Financing topic guide
Loan math, underwriting and promissory notes
Start by labelling the number or document the question asks for. A loan ratio, a monthly payment and the cash due at closing measure different things. The note states the repayment promise; the mortgage gives the lender security in the property. Once those jobs are clear, the calculations become easier to follow.
Last reviewed:
The short answer
LTV is loan amount divided by the specified property value. DTI is qualifying monthly debt divided by qualifying gross monthly income. Simple interest is principal times annual rate times time in years; points are a stated percentage of the loan amount. The note records the repayment promise, while the mortgage or other security instrument secures the obligation with real estate. Underwriting checks the borrower, property, funds and applicable loan rules. A correct ratio alone does not approve a loan.
The PSI outline effective June 24, 2026 covers loan financing and underwriting in National IV.A.1-2, mortgage or deed-of-trust clauses in IV.A.3 and promissory-note elements in IV.A.4. Amortized, balloon and interest-only loans appear in IV.B.2. The whole broker Financing category is 10%, or 10 of 100 scored national questions, not a quota for each formula. These original exercises use their stated assumptions and do not reproduce live PSI questions or set a validated readiness score.
Label the base, period and document before calculating
- Name the task: loan amount, value, debt ratio, interest, points, principal reduction, settlement funds or document purpose.
- Write the formula before inserting numbers. Label price and appraisal separately; identify first-lien debt, other secured debt and any undrawn credit line.
- Align the units. Use monthly debt with monthly gross income, and express simple-interest time as a fraction of a year. Do not invent a day-count convention.
- Check the payment components. A supplied total housing figure may already include taxes, insurance, dues or subordinate payments; count each required amount once.
- Separate price contribution from cash due at closing. Secondary financing, deposits, permitted cost credits and other stated adjustments have different jobs.
- Read the document for the actual promise, security, payment pattern and conditions. A sample form or preliminary letter does not establish every loan's terms.
- Keep the calculation and credit decision separate. Borrower evidence, collateral, source of funds and program conditions still matter.
- Compare compatible offers and watch the contract deadlines. A low note rate, signed Loan Estimate or preapproval label does not by itself guarantee funding.
| Task | Formula or document | Boundary |
|---|---|---|
| LTV | First mortgage / specified value x 100 | Identify the base and program |
| Maximum first loan | Specified value x allowed LTV | A classroom limit is not loan approval |
| First-loan price gap | Price - first loan | Other financing can cover part of it |
| Current simplified equity | Value - stated current secured debt | Not original down payment or net sale proceeds |
| Simple interest | Principal x annual rate x time in years | Use the stated time and day basis |
| Points charge | Loan amount x point percentage | One point is 1%; no fixed rate reduction |
| Back-end DTI | Qualifying monthly debts / gross monthly income x 100 | No duplicate housing component |
| Front-end ratio | Qualifying housing / gross monthly income x 100 | Not the same numerator as total DTI |
| Monthly gross from annual | Annual qualifying gross / 12 | Income still needs applicable qualification |
| Monthly principal paid | Applicable P&I payment - interest | Assumes no other allocation |
| Note | Repayment promise and debt terms | Security role does not alone prove personal liability |
| Mortgage or security instrument | Real-estate security for the obligation | Read applicable law and actual terms |
| Cash due at closing | Apply stated funding, costs, deposit and credits | Not automatically price minus first loan |
| TIP | Disclosed total interest / amount of credit x 100 | Whole loan term, not an annual rate |
The distinctions that matter
| Distinction | How it works | What to notice |
|---|---|---|
| The note and the mortgage | The note records a repayment promise and debt terms. The mortgage or other security instrument gives real-estate security for the debt or other secured obligation. | Choose the note for the promise; choose the security instrument for the lien. Not every promissory note is secured by real estate. |
| A mortgagor and a personally liable note borrower | The mortgagor gives the property interest as security. Personal liability depends on the repayment undertaking and applicable law, not the security label alone. Illinois also includes specified successors in its mortgagor definition. | When a land-trust trustee executes the mortgage, the Illinois definition identifies the trustee as mortgagor, not the beneficiaries. Do not infer who personally owes the note from beneficial ownership alone. |
| The mortgagee, note holder and servicer | The basic transaction has a borrower giving security to a lender. Illinois's mortgagee definition also reaches a holder or obligee, authorized representative and specified successor; servicing concerns day-to-day administration. | The original lender need not remain the payment servicer. A company collecting payments is not automatically proof of ownership or every enforcement right. |
| LTV, CLTV and HCLTV | LTV uses the specified first mortgage. The cited Fannie Mae CLTV calculation also counts drawn HELOC and closed-end subordinate balances; HCLTV uses the applicable full HELOC line rather than adding the drawn amount again. | State the program and measurement date. Undrawn capacity is different from debt already owed; these definitions do not make every program or delivery-rounding method identical. |
| Purchase price and the underwriting value | Use the base supplied by the problem. The cited Fannie Mae purchase rule generally uses the lower of price or current appraisal, subject to its product-specific provisions. | An 80% first loan on a $380,000 underwriting base is $304,000 even if the purchase price is $400,000. The $96,000 price gap is not automatically 20% of price. |
| The first-loan price gap and the buyer's cash contribution | Price minus the first loan is a financing gap. If the facts include a second loan, part of that gap is borrowed rather than contributed from the buyer's own funds. | The shortcut equals the buyer's own price contribution only under the stated funding assumptions; gifts, financed fees and other permitted sources require their own treatment. |
| Down payment, deposit and cash to close | A deposit already paid can be credited in settlement. Permitted cost credits and closing charges affect cash due, while the price contribution and required reserves are separate concepts. | Count each amount once. A cost credit is not automatically a permitted substitute for a required down payment, and a simplified exercise is not a full closing statement. |
| Front-end housing ratio and back-end DTI | The front-end ratio uses the stated qualifying housing expense. Back-end DTI uses qualifying housing and other qualifying monthly debt over qualifying gross monthly income. | Use compatible monthly units. Do not add a tax, insurance or debt payment twice when the supplied housing total already contains it. |
| Principal and interest, total payment and housing expense | P&I is not every housing cost. A disclosed total payment can also include mortgage insurance and escrow; relevant non-escrowed charges may remain payable separately. The cited PITIA definition has its own components. | A fixed P&I amount does not freeze property taxes, insurance or every total payment. No escrow does not make the underlying expense disappear. |
| Simple interest and an amortizing payment | Simple interest multiplies principal, rate and the stated time. An amortizing payment follows its payment schedule; it is not merely the annual interest divided by 12. | Use the note rate for interest, not APR. Calculate principal reduction only after identifying the specified interest and any other payment allocations. |
| Fully amortizing, interest-only, balloon and negative amortization | A fully amortizing schedule retires principal by its scheduled end. Interest-only payments leave principal unpaid during that period; a balloon leaves a large maturity payment. Capitalized unpaid interest can increase the balance. | Term and amortization period can differ. A smaller payment is not proof of lower cost or principal reduction, and later refinancing is not guaranteed. |
| A point, a rate percentage point, APR and TIP | One point is 1% of the stated loan amount. Discount points buy a lower note rate on the offered terms, but do not promise a one-percentage-point reduction. APR and total interest percentage are separate disclosures. | Do not substitute the price as the point base, APR as the note rate, or a whole-term TIP for an annual rate. Not every origination fee is a discount point. |
| A strong ratio and a completed underwriting decision | The covered ability-to-repay rule requires the applicable reasonable, good-faith determination using needed verified resources and obligations. Employment is relevant when its income is relied upon. | The securing dwelling's value is not itself a repayment resource under the general rule. No universal DTI, score or promise of appreciation replaces the complete file. |
| Preapproval, a Loan Estimate and a commitment | Prequalification and preapproval labels vary among lenders. A Loan Estimate discloses terms and costs; its receipt signature does not itself mean accepting the loan. An actual commitment requires its conditions to be read. | Neither a label nor a correct calculation automatically clears property conditions, guarantees a rate or extends the purchase contract's financing deadline. |
Work through the facts
Find the maximum loan from LTV
A lender permits an 80% LTV on a property valued at $425,000. The exam asks for the maximum first-loan amount.
- Write loan = value x LTV.
- $425,000 x 0.80 equals $340,000.
Answer: The maximum loan is $340,000. If the purchase price is also $425,000 and no other financing applies, the price-minus-loan difference is $85,000 before closing costs.
Calculate back-end DTI
A borrower earns $9,000 gross per month. The proposed housing obligation is $2,450, a car payment is $550, and qualifying revolving debt is $240.
- Total specified monthly debt is $2,450 + $550 + $240 = $3,240.
- $3,240 / $9,000 = 0.36.
Answer: The DTI is 36%. Whether it qualifies depends on the program, complete file, verified figures, and underwriting rules, not the arithmetic alone.
Choose the right instrument
A borrower signs one document promising to repay $310,000 and another document granting the lender a security interest in the home.
- The repayment promise and debt terms belong to the promissory note.
- The lien and foreclosure remedy belong to the mortgage or security instrument.
Answer: The first document is the note; the second is the mortgage or security instrument.
Separate interest rate from APR
Two Loan Estimates have the same loan amount. Offer A has a 6.25% rate with higher points, while Offer B has a 6.50% rate with lower upfront costs.
- The interest rate alone does not capture every specified credit cost.
- APR, origination charges, points, cash to close, payment, five-year cost, and expected holding period answer different comparison questions.
Answer: Compare the standardized disclosures and the borrower's expected use of the loan. Do not announce a winner from the note rate alone.
Use the stated purchase base before finding the price gap
In this simplified purchase, price is $400,000, current appraisal is $380,000, and the applicable stated underwriting rule uses the lower figure with an 80% maximum first-loan ratio. No financed addition changes that calculation.
- The stated base is $380,000, not $400,000.
- $380,000 x 0.80 = $304,000 maximum first loan.
- $400,000 - $304,000 = $96,000 price gap. Other financing and settlement costs require separate facts; this is not an approval.
Answer: The stated maximum first loan is $304,000 and the price-minus-first-loan gap is $96,000.
Use the right monthly numerator once
For this exercise, qualifying gross annual income is $96,000. The complete qualifying housing total is $2,400 monthly, already including every housing component required here. Other qualifying monthly debt is $800, not already included in housing.
- Monthly gross income is $96,000 / 12 = $8,000.
- Front-end housing ratio is $2,400 / $8,000 = 30%.
- Back-end DTI is ($2,400 + $800) / $8,000 = 40%. Do not add taxes, insurance or the same debt again.
- The assumed qualifying amounts make the arithmetic possible; they do not establish eligibility or a universal DTI limit.
Answer: The stated front-end ratio is 30% and back-end DTI is 40%.
Interest is not automatically the whole payment
Compare two independent classroom calculations. File A stipulates simple interest on $180,000 at 6% annually for three months, using 3/12 of a year. File B has a $240,000 opening balance at a 6% annual note rate, a monthly rate of 6% / 12 and a supplied $1,500 P&I payment, with no other allocation.
- File A interest: $180,000 x 0.06 x 3/12 = $2,700. It does not use a daily calendar convention.
- File B monthly interest: $240,000 x 0.06 / 12 = $1,200.
- $1,500 - $1,200 = $300 principal reduction, leaving $239,700. The $1,200 interest is not the full supplied installment.
- These are independent stated calculations, not an actual lender payment quote; APR, taxes, insurance and other charges have their own treatment.
Answer: The simple-interest result is $2,700. The separate monthly example pays $1,200 interest and $300 principal.
A payment can leave principal unchanged or increase it
Use two independent one-period examples with no fees, other charges or principal payments. Each starts at $200,000 with $1,000 accrued interest. File A pays the full $1,000 interest only. File B pays $700, and its stipulated terms add the unpaid interest to principal.
- File A covers interest but pays no principal, leaving $200,000.
- File B leaves $1,000 - $700 = $300 unpaid interest. Capitalizing it gives $200,300.
- The interest-only result is different from negative amortization. Neither retires principal in the stated period.
- This does not approve a product or promise that future interest, payments or refinancing will remain available on these terms.
Answer: The interest-only balance stays $200,000; the stipulated negative-amortization balance becomes $200,300.
Separate the buyer's contribution from additional settlement cash
In this simplified purchase, the $400,000 price is funded by a $304,000 first loan, a stipulated permitted $40,000 second loan and the buyer's remaining contribution. Specified costs are $6,000, a $10,000 deposit has already been paid, and a separate permitted $2,000 credit applies toward those costs. There is no overlap, financed addition, other adjustment or extra reserve requirement in the exercise.
- The first-loan gap is $96,000, but $40,000 of that is supplied by the stated second financing. The buyer's contribution toward price is $56,000.
- Additional cash is $56,000 + $6,000 - $10,000 - $2,000 = $50,000.
- The deposit is credited once. The allowed cost credit reduces the specified costs; it is not assumed to satisfy a separate required down payment.
- This exercise stipulates permitted funding and charges. It does not approve a private second loan, establish every source-of-funds condition or replace a complete closing disclosure.
Answer: The stated buyer price contribution is $56,000; additional settlement cash is $50,000.
Separate principal recovery, borrowing cost and whole-term interest
A classroom five-year comparison supplies $90,000 total scheduled principal, interest, mortgage insurance and loan costs, of which $18,000 is principal paid off. In an independent TIP calculation, the disclosed whole-term interest is stipulated at $192,000 and the amount of credit at $240,000.
- The five-year nonprincipal difference is $90,000 - $18,000 = $72,000. It retains the applicable mortgage insurance and loan-cost components rather than being automatically interest alone.
- The independent TIP is $192,000 / $240,000 x 100 = 80%. That is a whole-term interest percentage, not an annual rate or APR.
- These supplied figures are not a completed loan form, every cost of ownership or an actual cost prediction. Payment timing, extra principal, shorter terms and adjustable-loan assumptions require their own treatment.
Answer: The stated nonprincipal five-year difference is $72,000; the separate whole-term TIP is 80%.
Mistakes to avoid
- Every mortgagor is personally liable on the note Distinguish the property-security role from an actual repayment undertaking.
- The payment servicer must own every loan it administers Servicing, ownership and authority to enforce require their own facts.
- The higher purchase price always supplies the LTV base Use the stated rule; the cited purchase rule generally uses the lower price or appraisal.
- Price minus the first mortgage is always the buyer's cash down payment Secondary financing and other stated funding can change the buyer's own contribution.
- Undrawn HELOC capacity is already current debt Separate drawn debt, full-line exposure and the applicable ratio.
- A deposit reduces the required price contribution twice Credit an already-paid deposit once in the stated settlement calculation.
- A cost credit automatically pays the required down payment Apply the actual permitted use and lender or program conditions.
- DTI uses annual income with monthly debt Convert to compatible periods and use qualifying gross income.
- The supplied housing total needs taxes and insurance added again Inspect its components and avoid double counting.
- A fixed-rate loan freezes all housing costs Fixed P&I does not freeze taxes, insurance or every other charge.
- Annual interest divided by 12 is the fully amortizing monthly payment That gives the stated monthly interest under the assumed convention, not the complete installment.
- A discount point guarantees a one-point rate drop A point measures an upfront percentage charge; actual pricing determines the rate change.
- The lower note rate always makes the cheaper loan Compare compatible terms, costs, credits, period and actual conditions.
- A high practice score proves approval or exam readiness No validated readiness cutoff or loan outcome is established for this original set.
Check your understanding
These are original teaching questions, not recalled or predicted PSI questions. Answer first, then explain why the other choices fail.
1. Which document is the borrower's written promise to repay a mortgage loan?
- Promissory note
- Deed of trust securing the obligation
- Loan Estimate confirming receipt of disclosed terms
- Mortgage granting security in the property
Show answer and explanation
Answer: A. Promissory note
The note evidences the debt and states the repayment terms. The mortgage separately secures that debt with the property.
2. A borrower obtains a $270,000 loan on a property valued at $337,500. What is the LTV?
- 75%
- 125%
- 90%
- 80%
Show answer and explanation
Answer: D. 80%
$270,000 divided by $337,500 equals 0.80, or 80%.
3. A borrower has $2,800 in qualifying monthly obligations and $7,000 in gross monthly income. What is the DTI?
- 25%
- 35%
- 250%
- 40%
Show answer and explanation
Answer: D. 40%
$2,800 divided by $7,000 equals 0.40, or 40%.
4. What is one discount point on a $320,000 loan?
- $32,000
- $320
- $1,600
- $3,200
Show answer and explanation
Answer: D. $3,200
One point is 1% of the loan amount. $320,000 x 0.01 equals $3,200.
5. Which statement about underwriting is most accurate?
- It evaluates verified repayment ability, credit, funds, collateral, and program eligibility
- It substitutes the appraised collateral value for all verification of repayment resources
- It relies on a qualifying credit score without reviewing the property or repayment resources
- It approves every loan whenever the calculated DTI is exactly 40%
Show answer and explanation
Answer: A. It evaluates verified repayment ability, credit, funds, collateral, and program eligibility
Underwriting applies lender and program standards to the borrower, property, and transaction evidence.
6. A stated purchase rule uses the lower of a $400,000 price and $380,000 current appraisal. At an 80% maximum first-loan ratio, with no financed addition, what is the maximum first loan?
- $380,000
- $320,000
- $304,000
- $96,000
Show answer and explanation
Answer: C. $304,000
Use $380,000 x 0.80 = $304,000. Applying the ratio to the higher price would use the wrong stipulated base; this calculation is not a loan approval.
7. Price is $400,000 and the first mortgage is $304,000. Before determining any other financing or settlement adjustments, what is the price-minus-first-loan gap?
- $304,000
- $80,000
- $76,000
- $96,000
Show answer and explanation
Answer: D. $96,000
$400,000 - $304,000 = $96,000. Calling all of that the buyer's own cash contribution would require facts about other funding.
8. Qualifying gross annual income is $96,000. Complete qualifying housing is $2,400 monthly and other qualifying monthly debt is $800, counted once. What is back-end DTI?
- 30%
- 40%
- 250%
- 3.33%
Show answer and explanation
Answer: B. 40%
Divide annual income by 12 for $8,000 monthly gross. Total specified debt is $3,200; $3,200 / $8,000 = 40%. That ratio alone does not decide approval.
9. Using stipulated simple interest for three months as 3/12 of a year, what is interest on $180,000 at 6% annually?
- $2,700
- $32,400
- $900
- $10,800
Show answer and explanation
Answer: A. $2,700
$180,000 x 0.06 x 3/12 = $2,700. This is not a daily-interest convention or the calculation of an amortizing installment.
10. Opening balance is $240,000, annual note rate 6%, and the stated monthly convention is rate / 12. A supplied P&I payment is $1,500 with no other allocation. How much reduces principal for that period?
- $14,400
- $1,500
- $300
- $1,200
Show answer and explanation
Answer: C. $300
Monthly interest is $1,200, leaving $300 of the $1,500 payment for principal. The balance becomes $239,700. APR is not the rate used in this stated calculation.
11. A one-period exercise starts with $200,000 principal and $1,000 accrued interest. The borrower pays $700; the stated terms capitalize the unpaid interest, with no other adjustment. What is the new principal balance?
- $201,000
- $200,300
- $200,000
- $199,300
Show answer and explanation
Answer: B. $200,300
Unpaid interest is $300. Add that amount once to the $200,000 principal; a payment smaller than accrued interest does not reduce principal under these stipulated terms.
12. Does being named mortgagor, by itself, establish personal liability for every promise in a separate note?
- Yes, whenever the person is a land-trust beneficiary
- Yes, regardless of the repayment undertaking
- No, because no mortgage loan can have personal liability
- No; distinguish the property-security role from the actual personal repayment obligation
Show answer and explanation
Answer: D. No; distinguish the property-security role from the actual personal repayment obligation
The security interest and personal undertaking are separate questions. Illinois's mortgagor definition concerns the property interest and specified successors; private signatures, obligations and applicable law need their own review.
13. Which figure should replace the 6% note rate in a stated monthly-interest calculation solely because it is also disclosed?
- The whole-term TIP
- None of these; use the stated note rate and interest convention
- Any higher APR
- The five-year cost percentage
Show answer and explanation
Answer: B. None of these; use the stated note rate and interest convention
APR, TIP and a period cost have different purposes. They are not interchangeable with the note rate used for the stipulated interest calculation.
14. What is a 1.5-point charge calculated on a stated $304,000 loan amount?
- $4,560
- $456
- $6,000
- $45,600
Show answer and explanation
Answer: A. $4,560
$304,000 x 0.015 = $4,560. The purchase price is not this charge's stipulated base, and 1.5 points does not promise a 1.5-percentage-point rate reduction.
15. Monthly qualifying housing is $2,400, other qualifying monthly debt $800 and gross monthly qualifying income $8,000. Which pair is the front-end ratio followed by back-end DTI?
- 40% and 40%
- 30% and 40%
- 30% and 3.33%
- 40% and 30%
Show answer and explanation
Answer: B. 30% and 40%
The housing numerator gives 30%; including the separate $800 debt gives 40%. Avoid adding any component already counted in the complete housing total.
16. For a covered ability-to-repay assessment, may a creditor ignore a known simultaneous home-equity borrowing obligation solely because it is not the first mortgage?
- Yes; all HELOCs are outside every repayment assessment
- Yes; the appraisal replaces the need to consider debt
- Yes; only the first mortgage matters
- No; apply the required treatment of known or reasonably known simultaneous obligations
Show answer and explanation
Answer: D. No; apply the required treatment of known or reasonably known simultaneous obligations
The specified general rule includes known or reasonably known simultaneous obligations, including qualifying HELOC circumstances. Do not count the same payment twice if the supplied housing total already includes it; actual payment-calculation rules still matter.
17. In a stipulated purchase, price is $400,000, first loan $304,000 and a permitted separate second loan $40,000. The buyer supplies the remaining price contribution. Add $6,000 costs, subtract a $10,000 deposit already paid and a separate permitted $2,000 credit toward those costs. With no overlap or other adjustment, how much additional cash is due in this exercise?
- $96,000
- $56,000
- $50,000
- $60,000
Show answer and explanation
Answer: C. $50,000
Own price contribution is $400,000 - $304,000 - $40,000 = $56,000. Then $56,000 + $6,000 - $10,000 - $2,000 = $50,000. The cost credit offsets eligible costs, not an assumed required down payment; this is not a complete real settlement or loan approval.
18. A stated Loan Estimate comparison shows $90,000 in total scheduled five-year principal, interest, mortgage insurance and loan costs, with $18,000 principal paid off. What is the disclosed nonprincipal difference?
- $72,000
- $108,000
- $18,000
- $90,000
Show answer and explanation
Answer: A. $72,000
Subtract principal once: $90,000 - $18,000 = $72,000. It includes the applicable interest, mortgage insurance and loan costs in the stated total, not every homeownership cost or necessarily interest alone.
19. For the defined DTI quotient, qualifying monthly debt is positive but the supplied qualifying gross monthly income is zero. What does debt / income give?
- A guaranteed 0% DTI
- An automatic 100% DTI
- No defined numerical quotient; more than this formula is needed to evaluate the file
- A guaranteed approval based on infinite borrowing capacity
Show answer and explanation
Answer: C. No defined numerical quotient; more than this formula is needed to evaluate the file
Division by zero is undefined. Do not invent a zero ratio or a universal approval or rejection outcome; applicable resources, program and underwriting requirements need their own evaluation.
20. Use the stated Fannie Mae-style raw calculations at one snapshot: original and current first mortgage are both $300,000, closed-end subordinate balance $20,000, HELOC drawn balance $10,000 and unmodified full line $40,000. The common value base is $400,000. What are LTV, CLTV and HCLTV, before any delivery rounding?
- 82.5%, 90% and 92.5%
- 75%, 82.5% and 90%
- 75%, 82.5% and 92.5%
- 75%, 90% and 82.5%
Show answer and explanation
Answer: B. 75%, 82.5% and 90%
LTV = $300,000 / $400,000 = 75%. CLTV = ($300,000 + $20,000 + $10,000) / $400,000 = 82.5%. HCLTV replaces the draw with the full line: ($300,000 + $20,000 + $40,000) / $400,000 = 90%; it does not add both the $10,000 draw and $40,000 line. These raw figures do not establish program approval.
Common questions
What is the difference between a promissory note and a mortgage?
The note records the repayment promise and debt terms, such as principal, note rate, payment dates and maturity. A mortgage or other security instrument secures the obligation with real estate. A note can exist without real-estate security, and the security instrument can secure a debt or another obligation under Illinois's definition. Do not treat the two documents as interchangeable or decide a private instrument's enforceability from its title alone.
Is every mortgagor also personally liable on the note?
Not simply because of that label. The mortgagor's property interest supplies security; a personal repayment undertaking is a separate question. Illinois includes the person whose interest is subject to the mortgage and specified successors. When a land-trust trustee executes the mortgage, the statutory mortgagor is that trustee rather than the beneficiaries. That does not decide personal liability, beneficial ownership or an actual trustee's authority. Read the actual obligations and applicable law.
How do I calculate LTV when the price and appraisal differ?
Identify the rule supplied. The cited Fannie Mae purchase rule generally divides the original first-loan amount by the lower of sales price or current appraisal, with specified product differences. Its refinance base and special financed-insurance or other cases have their own provisions. In the stated $400,000-price, $380,000-appraisal exercise, 80% of the lower base permits a $304,000 first loan. Raw arithmetic, program delivery rounding and actual eligibility are separate; no one convention is every exam problem's default.
Is price minus the first mortgage always the cash down payment?
It is the gap left by that first loan. In a simple purchase with no other financing or funding adjustment, it can equal the buyer's price contribution. With a second loan, part of the gap is borrowed. A $400,000 price less a $304,000 first loan leaves $96,000; a separate stipulated $40,000 second loan leaves $56,000 from the buyer toward price. Closing costs, permitted credits, deposits, gifts, financed additions and reserves need their own facts.
How do front-end and back-end debt ratios differ?
Use qualifying gross monthly income in the denominator and the numerator requested. The front-end ratio uses the stated qualifying housing expense. Back-end DTI also includes other qualifying monthly debt. Annual qualifying gross of $96,000 becomes $8,000 per month. With complete housing of $2,400 and separate other debt of $800, the ratios are 30% and 40%. A quoted housing total may already contain taxes, insurance, dues or subordinate payments; do not add them twice.
Does a 40% DTI or a good credit score guarantee a loan?
No. Different programs and lenders apply their applicable standards and the full file still matters. The covered ability-to-repay rule requires a reasonable, good-faith determination at or before consummation using its applicable factors and verification. It does not make 43%, 40% or any other one DTI a universal approval rule. The creditor considers needed resources and obligations; collateral value, a promise of appreciation or a future refinance does not replace repayment ability.
Must every applicant have full-time employment to satisfy ability to repay?
The general rule permits the applicable current or reasonably expected income or assets relied upon, excluding the value of the dwelling securing the loan. Employment status matters when employment income is relied upon; that does not make full-time employment a universal condition. Needed income or assets require the applicable reliable verification. Simultaneous loans, recurring housing obligations, debts, DTI or residual income and credit history have their own treatment. This guide does not decide a private income source or qualification.
Is monthly principal and interest the whole housing payment?
Usually there are other relevant charges. The Loan Estimate distinguishes P&I, mortgage insurance, escrow and estimated taxes, insurance and assessments, including applicable items paid outside escrow. The cited Fannie Mae housing-expense definition has its own PITIA components, including specified dues and subordinate payments. A fixed P&I installment does not freeze insurance, taxes or every total payment. No escrow does not remove a recurring expense, and an amount already included should not be added again.
How do I calculate simple interest and principal reduction?
For stipulated simple interest, multiply principal by annual note rate and the stated fraction of a year. $180,000 x 6% x 3/12 is $2,700. Do not invent a 360-day or 365-day convention when none is supplied. In a separate stated monthly example, $240,000 x 6% / 12 is $1,200 interest. If the supplied P&I payment is $1,500 with no other allocation, $300 reduces principal. The interest amount alone is not the whole amortizing payment.
How do amortization, interest-only payments and balloons differ?
Fully amortizing scheduled installments repay principal by the scheduled end under their terms. A typical fixed-rate schedule has level P&I while the interest and principal shares change. Interest-only payments leave principal unpaid during that period; a balloon leaves a larger final maturity amount. The loan term and amortization period can differ. If unpaid interest is added to principal, negative amortization increases the balance even though a payment was made. Future refinancing is not guaranteed.
What does one point cost, and how much does it lower the rate?
One point is 1% of the stated loan amount. On $320,000, that is $3,200; 1.5 points on $304,000 is $4,560. Discount points are an upfront charge for a lower note rate under the offered pricing, but one point does not guarantee a one-percentage-point reduction. An origination charge is not automatically a discount point. Lender credits can reduce upfront cash while other terms change; compare the actual offer and permitted use rather than treating the credit as free financing.
Can I use APR or TIP instead of the note interest rate?
No. The note rate prices interest on principal under the loan terms. APR is a broader disclosed credit-cost rate; it is usually higher, but not a universal rule that it must be. TIP compares disclosed total interest over the loan term with the amount of credit, so it is not an annual rate or APR. ARM APR is not the maximum future rate, and unlike loan products may have different disclosure assumptions. Compare compatible offers and do not announce a winner from one rate alone.
Does preapproval or signing a Loan Estimate mean I accepted an approved loan?
No such result follows merely from the label or receipt signature. Lenders use prequalification and preapproval differently, and an actual conditional commitment must be read for its terms. The Loan Estimate's confirmation signature concerns receipt; the rule says it does not require acceptance. Property, funds, verification, rate-lock and other conditions may remain. This does not mean every letter is nonbinding or that a federal disclosure changes the purchase contract's deadlines.
What practice score proves I am ready for these questions?
No validated readiness cutoff or pass probability is established for this original set. Write the formula, state the denominator and period, then explain the nearest wrong option. Rework a changed example after a delay. These are original questions based on public subject areas, not recalled live PSI items. The whole Financing weight does not assign a quota to each calculation or authorize a particular calculator or exam tool.
How do I build a cash-to-close calculation without counting money twice?
Use the exact funding and settlement facts. In the exercise, $400,000 price less $304,000 first financing and a permitted $40,000 second loan leaves $56,000 of the buyer's price contribution. Add $6,000 specified costs, then subtract the $10,000 deposit already paid and a separate permitted $2,000 credit toward those costs: $50,000 additional cash. The deposit is credited once, and the cost credit is not assumed to replace a required down payment. No other adjustment, overlapping credit, financed addition or reserve is supplied. An actual disclosure, funding source and program can require more.
How do CLTV and HCLTV treat a HELOC?
Under the cited Fannie Mae definitions, CLTV uses the drawn HELOC balance, while HCLTV uses the applicable full line together with the defined first and closed-end subordinate amounts. At the stated snapshot, first debt is both originally and currently $300,000, closed-end second debt $20,000, HELOC draw $10,000 and unmodified line $40,000 on a $400,000 base. Raw LTV, CLTV and HCLTV are 75%, 82.5% and 90%. Do not add both draw and full line in HCLTV. Current debt is $330,000, so simplified current equity is $70,000; the undrawn $30,000 is capacity, not already owed. Program delivery rounding, special cases and actual eligibility remain separate.
Does the Loan Estimate five-year total show interest alone, and is TIP an annual rate?
Neither shortcut is correct. The stated five-year total includes scheduled principal, interest, mortgage insurance and loan costs. Subtracting the principal component leaves the stated nonprincipal components: $90,000 - $18,000 = $72,000. It is not every cost of owning the home or an actual future-cost guarantee. Separately, if disclosed whole-term interest is stipulated at $192,000 on $240,000 of credit, TIP is 80%. That measures interest over the loan term, not an 80% annual rate, APR or note rate. The disclosures use their applicable assumptions, including different treatment for shorter terms and adjustable products.
What if a ratio has a zero denominator or the calculation looks unusually strong?
A zero value base makes loan / value undefined, and zero qualifying income makes the stated debt / income quotient undefined. Neither is a guaranteed zero ratio or infinite borrowing capacity. With valid positive denominators, a calculated ratio still measures only what its definition includes. LTV does not establish repayment ability, DTI does not approve collateral, and current equity is not cash available at settlement. The creditor must apply the relevant coverage, verified resources, obligations and program standards; a formula alone does not decide an actual approval or rejection.
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Official sources and scope
Reviewed October 28, 2026 using the identified PSI outline, Illinois definitions, CFPB guidance and regulations, and relevant Fannie Mae provisions. Fresh readings and earlier actual readings are documented separately. The CFPB note explainer contains an older sample form; the separately identified Fannie Mae model has its own edition. Neither is every borrower's contract. The numbers below are classroom assumptions, not current loan offers, eligibility decisions, payoff statements or completed disclosures.
- PSI Illinois Candidate Information Booklet: National XI calculations
- CFPB: P&I versus total monthly payment
- CFPB: mortgage paydown and amortization
- CFPB Loan Estimate explainer: payment and separately paid items
- Fannie Mae B3-6-03: qualifying monthly housing expense
- CFPB: mortgage note rate and APR
- Fannie Mae B2-1.2-01: LTV definitions and delivery rounding
- Fannie Mae B2-1.2-02: combined loan-to-value
- Fannie Mae B2-1.2-03: full HELOC exposure and permanent modifications
- CFPB: discount points, lender credits and actual pricing
- CFPB Regulation Z 1026.37: payment components, origination points and credits
- CFPB: home equity and home-equity loans
- CFPB: payoff amount versus current mortgage balance
- 735 ILCS 5/15-1207: mortgage definition and included security instruments
- 735 ILCS 5/15-1208: secured holder, authorized actor and successor
- 735 ILCS 5/15-1209: property-interest party, successors and land-trust trustee
- Fannie Mae/Freddie Mac Form 3200, 07/2021: Sections 4, 6 and 10
- CFPB: mortgage lender and loan servicer are different functions
- CFPB Regulation Z 1026.43: general repayment determination and coverage
- CFPB: prequalification and preapproval labels and conditions
- CFPB 2014 annotated sample: general purpose of a promissory note
- CFPB: debt-to-income ratio and differing lender limits
- CFPB: negative amortization
- CFPB: comparing Loan Estimates
This is exam preparation, not advice for a specific transaction. State law and the applicable facts control. Our editorial and corrections process explains how to report an issue.