General Mortgage Knowledge
This domain tests the vocabulary and mechanics of the loan itself: documents, products, pricing, amortization, and collateral concepts. Scenario questions build on these definitions, so precision matters more than breadth.
Documents and payment components
- The note is the promise to pay; the security instrument is a mortgage in the District of Columbia and a deed of trust in many states; riders add ARM, condo, or occupancy terms.
- PITI is principal, interest, taxes, and insurance; escrow may also collect hazard, flood, and mortgage insurance.
- Title insurance: a lender's policy is required, an owner's policy is optional, and schedule exceptions limit coverage.
Products and eligibility
- Conventional conforming loans meet Fannie Mae/Freddie Mac limits; FHA uses mortgage insurance premiums and lower down payments; VA has a funding fee and no monthly mortgage insurance; USDA is rural and income-limited.
- Occupancy - primary residence, second home, investment - changes pricing, reserves, and documentation.
- Government programs impose their own appraisal, property-condition, and fee rules.
Ratios and pricing
- LTV = loan amount ÷ the lesser of sales price or appraised value; CLTV adds subordinate liens. Conventional loans generally require PMI above 80 percent LTV.
- DTI = total monthly obligations ÷ gross monthly income; automated findings often cap near 43–50 percent.
- Discount points are prepaid interest that lowers the rate; origination points are a fee. The APR includes certain finance charges and is not the note rate.
ARMs and amortization
- Fully indexed rate = index + margin; caps are initial, periodic, and lifetime; lookback and adjustment frequency matter.
- Fixed-rate loans amortize over the term; interest-only and negative-amortization structures change how principal behaves.
Worked example
Purchase price is $420,000 and the appraisal is $410,000; the loan is $389,500. LTV uses the lesser value: 389,500 ÷ 410,000 = 95 percent, so PMI applies on a conventional loan. Adding a $15,000 second lien gives CLTV of 404,500 ÷ 410,000 = 98.7 percent, likely outside program limits even though first-lien LTV is unchanged.
Traps that cost marks
- Using the purchase price instead of the lesser of price and value.
- Confusing APR with note rate, or discount points with origination fees.
- Assuming VA loans carry monthly mortgage insurance, or that FHA has no upfront premium.
- Swapping margin and index, or ignoring the lifetime cap.