General Mortgage Knowledge
Core concepts
This domain tests programs, documents, and math. The note is the promise to pay; the mortgage or deed of trust is the security instrument; lien priority follows recording order and subordination agreements. The monthly payment is PITI - principal, interest, taxes, insurance - plus mortgage insurance and HOA dues where applicable. Qualification rests on LTV/CLTV and DTI, split into a front-end housing ratio and a back-end total ratio. Know the program differences: conventional loans carry PMI above 80% LTV, cancellable under the Homeowners Protection Act at 80% on borrower request and automatically at 78%; FHA pairs an upfront MIP with an annual MIP that lasts the life of most loans and allows 3.5% down with a 580+ score; VA offers no down payment with a funding fee, entitlement, and residual income analysis; USDA requires rural eligibility and income caps plus a guarantee fee. ARMs are described by index, margin, caps, and fully indexed rate. Understand how discount points and buydowns affect rate versus APR, and how Fannie Mae, Freddie Mac, and Ginnie Mae create the secondary market.
Traps
- APR versus note rate: APR folds in finance charges, so a "no cost" loan can still show a higher APR.
- For a purchase, LTV uses the lesser of the sales price or the appraised value.
- PMI termination is measured against original value and the original amortization schedule, not today's market value.
- Prepayment penalty questions concern the note; points questions concern cost, not rate.
Worked example
Purchase price $400,000, appraisal $390,000, loan amount $312,000. LTV = 312,000 ÷ 390,000 = 80%, so no PMI is required. Rule of thumb: when price and appraised value disagree, underwrite to the lower number.