General Mortgage Knowledge
This domain tests whether you understand the product and the math behind it.
Know the loan families. Conventional loans conform to Fannie Mae/Freddie Mac guidelines and loan limits; loans above the limit are jumbo. FHA insures loans with lower credit and down payment thresholds and requires mortgage insurance premiums. VA guarantees loans for eligible veterans, often with no down payment and a funding fee. USDA targets rural properties with income limits. Government loans are insured or guaranteed, never made, by the agency.
Know the payment. PITI is principal, interest, taxes, and insurance. Principal and interest follow an amortization schedule: early payments are interest-heavy, and the balance falls slowly at first. Escrow collects taxes and hazard insurance monthly. PMI is generally required above 80% LTV and must terminate at 78% of original value on request-based schedules for conforming loans.
Know the ratios. LTV is loan amount divided by appraised value (or purchase price, whichever is lower). CLTV adds subordinate liens. Front-end ratio is housing expense to income; back-end ratio adds all recurring debt.
Know the rate mechanics. Discount points are prepaid interest that buy down the rate; origination fees pay the lender. Prepaid interest runs from closing to month end. ARMs carry an initial fixed period, then adjust by index plus margin, limited by periodic and lifetime caps and a floor. The APR expresses the cost of credit as a yearly rate and includes fees, so it can differ from the note rate.
Trap: questions swap LTV and CLTV, or ask which cost is finance-charge vs. not. Rule of thumb: if it is required to get the loan and is not a government recording charge or title-related third-party fee, suspect it belongs in the finance charge.
Worked example: $300,000 loan on a $400,000 appraised purchase at $390,000 price - LTV uses $390,000, giving 76.9%, so PMI is not required on a conforming loan.