General mortgage knowledge
General mortgage knowledge tests loan products, terms, and the math used to qualify borrowers. Expect calculation and product-comparison questions rather than pure definitions.
Core concepts
- LTV is loan amount divided by the lesser of purchase price or appraised value on a purchase; on a refinance, use appraised value. CLTV adds subordinate liens.
- DTI compares gross monthly income with proposed PITI plus other debt. Automated underwriting findings often govern; manual limits vary by program.
- PITI is principal, interest, taxes, and insurance; escrow spreads these costs across monthly payments.
- PMI: borrower-requested cancellation at 80% LTV based on original value, automatic termination at 78% under the original amortization schedule, and final termination at the midpoint of the amortization period.
- Programs: FHA uses MIP and lower down payment; VA offers no monthly PMI but has a funding fee and COE; USDA is rural with a guarantee fee; conventional loans follow Fannie Mae and Freddie Mac guidelines.
- ARMs have an initial fixed period, index, margin, adjustment caps, and a fully indexed rate.
Worked example
Price is $300,000; appraisal is $310,000; loan is $270,000. LTV is 270,000 divided by 300,000, or 90%, so conventional PMI applies. If the appraisal were $280,000, LTV would be 270,000 divided by 280,000, or 96.4%, because the lesser value controls. To reach 80% LTV on the $300,000 price, the maximum loan is $240,000.
Traps
Dividing by the appraisal when the purchase price is lower; ignoring subordinate liens in CLTV; confusing the note rate with the APR; forgetting that ARM caps apply both per adjustment and over the life of the loan.