Chapter 2 of 520% of exam

General Mortgage Knowledge

A loan originator must understand the products offered, the math behind qualifying, and how a loan is structured over time. This chapter covers the core programs, loan features, and calculations used every day in the field.

Mortgage Programs

Borrowers choose among conventional and government-backed programs, each with its own guidelines and insurance. Knowing the strengths and limits of each program lets an originator match borrowers to the right loan. Government programs in particular serve buyers who may not fit conventional guidelines.

Conventional loans

Conventional loans are not insured by the government; those meeting agency size and underwriting limits are called conforming, and larger balances are jumbo loans.

FHA loans

FHA loans are insured by the Federal Housing Administration, allow lower down payments and credit scores, and require mortgage insurance premiums.

Federal Housing Administration (FHA)

VA loans

VA loans are guaranteed by the Department of Veterans Affairs for eligible veterans and service members, often with no down payment and no monthly mortgage insurance.

Department of Veterans Affairs (VA)

USDA loans

USDA Rural Development loans help eligible buyers in designated rural areas purchase with no down payment, subject to income limits.

USDA Rural Development

Loan Types and Features

Beyond the program, a loan's structure determines how the rate and payment behave over the life of the debt. Fixed and adjustable structures, along with special-purpose products, each carry distinct risks and benefits. Originators must explain these clearly so borrowers understand future payment changes.

Fixed-rate mortgage

The interest rate and principal-and-interest payment stay the same for the entire loan term, giving predictable payments.

Adjustable-rate mortgage caps

An ARM's rate can change after an initial fixed period, limited by an initial adjustment cap, a periodic cap, and a lifetime cap.

Interest-only loans

During an interest-only period the borrower pays only interest, so the principal balance does not decline until amortization begins.

Reverse mortgages

A reverse mortgage lets qualifying older homeowners convert equity into funds with no required monthly payment, repaid when the home is sold or the borrower leaves.

Qualifying and Cost Concepts

Lenders decide how much a borrower can afford using ratios that compare debt and housing cost to income and property value. These figures also shape pricing and the disclosures a borrower sees. Mastering them is essential for pre-qualifying applicants accurately.

LTV and CLTV

Loan-to-value compares the loan amount to the property value; combined loan-to-value adds all liens, and higher ratios generally mean higher risk and cost.

Debt-to-income ratio

DTI compares the borrower's monthly debt obligations to gross monthly income; front-end DTI counts only housing, back-end counts all debts.

PITI

The housing payment used in qualifying typically includes principal, interest, property taxes, and insurance, plus mortgage insurance or HOA dues where applicable.

APR versus note rate

The note rate is the interest charged on the balance, while the APR reflects the rate plus certain finance charges, so the APR is usually higher.

TILA / Regulation Z

Points and buydowns

One discount point equals one percent of the loan amount paid to lower the rate; a temporary buydown reduces the rate for the first years of the loan.

Amortization, Escrow, and Mortgage Insurance

Over time a loan's balance and payment composition shift, and lenders often collect for taxes and insurance along the way. Mortgage insurance protects lenders on higher-risk loans. Understanding these mechanics helps originators set correct expectations about monthly costs.

Amortization

On a fully amortizing loan, early payments are mostly interest and later payments are mostly principal, reaching a zero balance at the end of the term.

Escrow accounts

An escrow or impound account collects a portion of taxes and insurance with each payment so the servicer can pay those bills when due.

PMI versus MIP

Private mortgage insurance (PMI) applies to conventional loans and can be cancelled at set equity levels, while FHA's mortgage insurance premium (MIP) often lasts the life of the loan.

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Mortgage Origination Activities

Last updated: July 2026