Mortgage loan origination activities

Financial Calculations

Expect several calculation questions with a basic on-screen calculator. Most are one or two steps: ratios, LTV, points, per diem interest, escrow, ARM caps and tolerance cures. The traps are using the wrong base.

Mortgage loan origination activities3 min read7 sections

Must-know for the exam

Front-end ratio = PITIA / gross monthly income; back-end adds all recurring debts.
Biweekly pay x 26 / 12; semimonthly x 2; weekly x 52 / 12; hourly x hours x 52 / 12.
LTV on a purchase uses the lesser of price or appraised value; CLTV adds subordinate liens; HCLTV uses the full HELOC limit.
One discount point = 1% of the loan amount; break-even months = cost / monthly savings.
Per diem interest = loan x rate / 365 (or 360 if stated) x days; state whether the closing day counts.
Monthly escrow = annual taxes and insurance / 12; maximum cushion = one-sixth of annual disbursements (12 CFR 1024.17).
Interest-only payment = loan x rate / 12.
ARM: new rate = index + margin, limited by initial, periodic and lifetime caps.
10% tolerance cure = closing total - (LE total x 1.10), if positive (12 CFR 1026.19(e)(3)(ii)).
Amount financed = loan amount - prepaid finance charges (12 CFR 1026.18(b)).

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Traps that cost marks

Using net (take-home) pay instead of gross income.
Leaving the housing payment out of the back-end ratio.
Forgetting to subtract existing debts from the total DTI allowance.
Using the wrong number of pay periods, or forgetting to divide the annual figure by 12.
Treating semimonthly pay as biweekly.
Dividing two years of overtime by 12 months.
Assuming a 40-hour week for a part-time worker.
Using the higher appraised value on a purchase.

Why it matters on the test

Calculation items reward a calm, step-by-step method. Read what base the question wants (loan amount, price, value or income), compute, and check the result is plausible. Rates and limits that change, such as MIP or funding fee percentages, are normally given in the stem.

The rule: formulas

Calculation	Formula
Front-end ratio	PITIA / gross monthly income
Back-end ratio	(PITIA + recurring monthly debts) / gross monthly income
Max housing payment from DTI	DTI limit x income - other debts
Income needed	Total monthly obligations / DTI limit
LTV	Loan / lesser of price or appraised value (purchase); loan / appraised value (refinance)
CLTV / HCLTV	(All liens, HELOC drawn) / value; (all liens, HELOC limit) / value
Points	Loan amount x points %

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Frequently asked questions

How do you calculate loan-to-value on a purchase?

Divide the loan amount by the lower of the sales price and the appraised value, then multiply by 100. A $270,000 loan on a home bought for $300,000 that appraises at $310,000 has an LTV of 270,000 ÷ 300,000 = 90%.

What is the difference between front-end and back-end DTI?

Front-end (housing) ratio is the proposed monthly housing payment divided by gross monthly income. Back-end (total) ratio adds every other monthly debt payment to the housing payment before dividing by gross monthly income. Both use gross, not take-home, income.

How much does one discount point cost?

One point is 1% of the loan amount, not of the purchase price. On a $250,000 loan, 1.5 points cost $3,750.

Exam-style questions

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