General Mortgage Knowledge
This domain tests the product and math knowledge an originator must carry into a borrower conversation: what each loan program offers, how an adjustable-rate mortgage actually reprices, and how ratios and loan-to-value figures are computed. It rewards fluency with numbers, not memorized marketing language.
Program basics
- Conventional conforming: sold to Fannie Mae or Freddie Mac; PMI usually required above 80% LTV.
- FHA 203(b): 1.75% up-front MIP plus annual MIP; 3.5% down at 580+ scores.
- VA: entitlement-based, no monthly mortgage insurance, funding fee, 100% LTV for eligible veterans.
- USDA: rural eligibility and income caps, guarantee fee.
- Non-QM and jumbo: portfolio or private-label; ability-to-repay rules still apply.
ARM anatomy
The fully indexed rate equals index plus margin. Caps appear as three numbers - initial adjustment, periodic, lifetime. The payment after the first adjustment is built on the then-current index, never on the start rate.
Ratios and values
Front-end ratio is the housing payment divided by gross monthly income; back-end is all debt divided by income. HCLTV counts the full drawn HELOC line, not just the balance.
Worked example. A 5/1 ARM carries a 4.50% start rate, a 2.25% margin, and 2/2/5 caps. With the index at 4.75%, the fully indexed rate is 7.00%. Qualify at 7.00%: on $250,000 over 30 years the principal and interest is about $1,663 per month, versus roughly $1,267 at the start rate. Qualifying at the start rate understates the borrower's obligation by nearly $400 a month.
Traps. Confusing the margin with the rate; ignoring the lifetime cap when projecting payment shock; treating FHA MIP as if it were PMI; adding an undrawn HELOC line to CLTV instead of HCLTV; computing DTI on net rather than gross income.