Financing and the Mortgage Process
Financing and the Mortgage Process tests loan program selection, the math of monthly payment and loan-to-value, mortgage insurance rules, and the federal consumer-protection framework around origination.
Programs and underwriting
Conventional conforming loans meet Fannie Mae and Freddie Mac limits; jumbo loans exceed them. FHA insures higher-LTV loans with an upfront mortgage insurance premium plus an annual premium; VA guarantees loans for eligible veterans with a funding fee; USDA targets rural areas. Lenders underwrite on LTV, credit, reserves, and debt-to-income - PITI plus long-term obligations divided by gross monthly income.
Payments and amortization
The monthly PITI payment combines principal, interest, taxes, and insurance. Early payments are interest-heavy: on a $300,000 loan at 6%, month-one interest is $1,500, so a $1,798.65 payment retires only about $299 of principal. Discount points are prepaid interest that buy down the rate; the APR folds in fees, so it exceeds the note rate. ARM caps are quoted as initial, periodic, and lifetime.
Insurance and escrow rules
Conventional PMI terminates automatically at 78% of original value or at the midpoint of the amortization term, whichever comes first, and may be cancelled on borrower request at 80% if the borrower is current. RESPA limits the escrow cushion to one-sixth of annual disbursements and requires an annual escrow account statement.
Worked example
A borrower's original value is $400,000 and the scheduled balance has reached $320,000 - exactly 80%. She may request PMI cancellation in writing if she is current. Automatic termination happens without request at $312,000, which is 78% of original value, provided the loan is current. Appreciation in the home does not move these thresholds unless the borrower refinances.
Traps
Quoting the note rate as the APR; treating a preapproval as a loan commitment; assuming an existing FHA or VA loan can be assumed without lender approval; assuming 20% down is required; confusing LTV with combined LTV when a second lien exists; and telling a buyer they qualify when no underwriter has issued a decision, which is an ECOA risk.