General Mortgage Knowledge
What this domain tests
Products, property analysis, and the arithmetic underwriters use: LTV, DTI, PITI, amortization, mortgage insurance, and adjustable-rate mechanics.
Core calculations
- LTV = loan amount ÷ the lesser of sales price or appraised value. Higher LTV generally raises pricing and MI requirements.
- PITI = principal, interest, property taxes, and hazard insurance; add HOA dues and mortgage insurance for qualifying housing expense.
- Front-end DTI = housing expense ÷ gross monthly income; back-end DTI = all monthly obligations ÷ gross monthly income.
Products and features
Conventional loans may be conforming or non-conforming. FHA insures loans with upfront and annual MIP; VA guarantees with an entitlement and funding fee; USDA offers rural guaranteed loans. Fixed-rate loans have level principal and interest; ARMs carry an initial rate, index, margin, periodic and lifetime caps, and a lookback period. Prepayment penalties, balloon payments, and interest-only features are restricted in many programs.
Mortgage insurance
Conventional PMI is generally cancellable at the borrower's request at 80% LTV and terminates automatically at 78% of original value based on the amortization schedule. FHA MIP generally lasts the life of the loan when the down payment is under 10%.
Worked example
Purchase price $400,000, appraised value $410,000, loan $320,000. LTV uses the lower value ($400,000), so LTV = 80% and no PMI is required. If gross monthly income is $7,000 and total obligations including PITI are $2,800, back-end DTI is 40%.
Traps
- Dividing by appraised value when the sales price is lower.
- Mixing front-end and back-end DTI.
- Treating discount points as recurring interest rather than an upfront cost.
- Forgetting that HOA dues and MI count in housing expense.