General Mortgage Knowledge
Product families
Conventional loans follow Fannie Mae and Freddie Mac guidelines, and the conforming loan limit is announced annually by the FHFA, so understand the concept rather than memorizing one year's figure. FHA insures loans with low down payments (3.5% down with a 580+ score) and charges both an upfront and an annual mortgage insurance premium. VA guarantees loans for eligible veterans, generally with 0% down and a funding fee. USDA targets rural areas and applies income limits.
Numbers you must be able to compute
- LTV = loan ÷ the lesser of sales price or appraised value.
- CLTV = all liens ÷ value. A $300,000 purchase with $60,000 down is 80% LTV; adding a $30,000 second lien makes CLTV 90%.
- PITI = principal, interest, taxes, and insurance; escrow accounts collect taxes and insurance monthly.
- DTI = total monthly debts ÷ gross monthly income; 43% is the classic QM/ATR benchmark.
ARM vocabulary
The initial fixed period, index plus margin (the fully indexed rate), periodic and lifetime caps, and payment shock at the first adjustment. A 5/1 ARM is fixed for five years, then adjusts every year.
Traps
APR is not the note rate; it folds in fees and is useful only for comparison. On interest-only or negative-amortization products, the quoted payment is not principal and interest. For LTV, always use the lesser of price or appraisal.
Worked example
$400,000 appraisal, $380,000 purchase price, $304,000 loan. LTV = 304,000 ÷ 380,000 = 80%, so no PMI is required on a conventional loan.