General Mortgage Knowledge
Products and programs
Conventional loans follow Fannie Mae and Freddie Mac guidelines. FHA insures loans with more flexible credit and down-payment standards and requires mortgage insurance premiums. VA guarantees loans for eligible veterans, often with no monthly mortgage insurance but with a funding fee. USDA rural development loans carry income and location limits.
The math that drives approval
- LTV = loan amount divided by the lesser of purchase price or appraised value.
- PITI = principal, interest, taxes, and insurance, plus HOA dues and mortgage insurance where applicable.
- DTI: front-end ratio is housing expense divided by gross monthly income; back-end ratio adds all recurring debts.
- ATR/QM: creditors must verify and document income, assets, debts, and employment. The general QM framework uses a 43% DTI benchmark with price-based thresholds.
Documents and protections
The promissory note is the promise to repay. The mortgage or deed of trust is the security instrument. Riders add terms for ARMs, condominiums, and PUDs. Title insurance protects against ownership and lien defects. The appraisal is an opinion of value, not a warranty. Under the Homeowners Protection Act, borrower-requested PMI cancellation is generally available at 80% LTV based on original value, with automatic termination at 78%.
Worked example
Purchase price is $300,000 with 10% down, so the loan is $270,000 and LTV is 90%. Gross monthly income is $6,000, PITI is $1,800, and other monthly debts are $600. Back-end DTI is $2,400 divided by $6,000, or 40%. PMI is likely because LTV exceeds 80%.
Traps that cost marks
Do not use the higher of price or appraised value for LTV. Do not describe an appraisal as a guarantee of value. Do not omit HOA dues from DTI. Do not assume FHA and VA mortgage insurance work the same way.