General Mortgage Knowledge
This domain tests mortgage products and the math behind them: amortization, loan-to-value, private mortgage insurance, government programs, adjustable-rate features, and closing-cost components. Expect calculation questions and product-comparison questions.
Core concepts
- Amortization: Principal and interest are calculated on a declining balance. A fully amortizing loan retires at term; an interest-only loan does not; a balloon loan leaves a large balance due.
- LTV: Divide the loan amount by the lesser of the sales price or appraised value. Lower LTV generally means lower pricing and no PMI.
- PMI: Under the Homeowners Protection Act, borrowers may request cancellation at 80% LTV based on the original value, and automatic termination occurs at 78%, subject to conditions.
- FHA: 3.5% minimum down payment, upfront mortgage insurance premium that may be financed, and annual MIP whose duration depends on LTV and term.
- VA: No down payment for eligible veterans, a funding fee that varies by down payment and prior use, and a VA Notice of Value appraisal.
- USDA: Rural eligibility, income limits, and a guarantee fee.
- ARMs: An initial fixed period, then margin plus index, subject to initial, periodic, and lifetime caps.
- PITI: Principal, interest, taxes, and insurance; qualifying ratios use these components.
Worked example
Purchase price is $400,000; the appraisal is $380,000; the loan is $360,000. LTV is $360,000 ÷ $380,000 = 94.7%, not 90%, because the lesser value controls. A $300,000, 30-year loan at 6% has a principal-and-interest payment of about $1,798.65. Add taxes and insurance to get PITI.
Traps
Do not use the higher appraised value when it exceeds the purchase price. Do not treat upfront FHA MIP as an annual cost. Do not confuse the note rate with the APR, which includes finance charges.