General Mortgage Knowledge
What this domain tests
This domain tests mortgage products, loan terms, underwriting math, property valuation, and closing mechanics. You must identify a product from a scenario, calculate ratios, and explain how fees affect the annual percentage rate.
Core rules and concepts
- Loan types: Conventional loans may be agency-eligible; FHA loans are government-insured and carry mortgage insurance premiums; VA loans provide a guaranty to eligible veterans; USDA loans target rural areas and have income limits. Down payment, insurance, and underwriting differ by program.
- LTV: Loan amount divided by the lesser of purchase price or appraised value. CLTV adds subordinate liens to the first mortgage.
- DTI: Front-end ratio is the housing payment divided by gross monthly income; back-end ratio includes all monthly debt. Many programs cap back-end DTI in the low-to-mid 40s, though guidelines vary.
- ARMs: Index plus margin equals the fully indexed rate. Caps limit periodic and lifetime increases; teaser rates can make early payments lower.
- Escrow: PITI includes principal, interest, taxes, and insurance. RESPA limits escrow cushions.
- APR: Includes the finance charge and may differ from the note rate.
Worked example
Purchase price is $300,000; appraised value is $295,000; loan amount is $265,500. LTV equals $265,500 divided by $295,000, or 90%. Because LTV exceeds 80%, mortgage insurance is likely required. If the borrower also has a $20,000 second lien, CLTV equals $285,500 divided by $295,000, or 96.8%.
Traps
Using the purchase price when the appraisal is lower overstates collateral value. Forgetting closing costs understates cash to close. A prequalification is not a credit approval. A lower note rate does not guarantee a lower APR once fees are included.