Mortgage Math 1 - Chapter 7

Question 1

Simple Interest Rate

Answer 1

(aka nominal interest rate)

The fee or cost charged to the borrower by the lender for the borrower’s use of the lender’s money

Question 2

Simple Interest Rate Formula

Answer 2

Simple Interest Rate Formula And Example

Principal x Interest Rate x Duration of Loan (in years) = Simple Interest

Assume a lender has a bag with $100,000 in it and the borrower wants to use that $100,000 to buy something. The lender agrees to allow the borrower to use that $100,000 for five years. At the end of the five years the borrower must not only repay the $100,000 to the lender, but also 5% for each year of use of the money. So when it comes time to pay back the lender the borrower must not only give the lender
$100,000, but also the interest charged.
$100,000 x 5% x 5 = $25,000
$100,000 + $25,000 = $125,000
(Total amount to be repaid to the lender)

Question 3

4 Components of the PITI Payment

Answer 3

P - The principal portion of the payment
I - The interest portion of the payment
T - Monthly portion of the annual property tax
I - Monthly portion of the annual insurance payments (this may include homeowners and mortgage insurance)

Question 4

Interest- Only

Answer 4

The amount the client pays to borrow the money.

Question 5

Interest-Only Calculation

Answer 5

Interest-Only Calculation

Loan Amount x Interest Rate = Annual Interest Annual Interest ÷ 12 = Periodic I/O Payment

Question 6

Property Tax Calculation

Answer 6

Monthly Property Tax Calculation

Annual Property Taxes ÷ 12

Question 7

Hazard Insurance

Answer 7

Hazard insurance protects the property from damage. All lenders require borrowers to have this insurance as a condition of making the loan.

Question 8

Hazard Insurance Calculation

Answer 8

Monthly Hazard Insurance Calculation

Annual Hazard Insurance ÷ 12 = Monthly Insurance

Question 9

Mortgage Insurance

Answer 9

(Private Mortgage Insurance - PMI / Mortgage Insurance Premium - MIP):
Another insurance that a borrower may have as part of their payment calculation. While not part of all loan agreements, when required, mortgage insurance is something that we need to calculate as part of the borrower’s monthly PITI payment. We will explore the concept of mortgage insurance in a later chapter.

Question 10

Mortgage Insurance Calculation

Answer 10

Monthly Mortgage Insurance Calculation

Loan Amount x % of PMI/MIP = Annual PMI/MIP Annual PMI/MIP ÷ 12 = Monthly PMI/MIP

Question 11

DTI

Answer 11

Debt To Income

Question 12

Housing DTI

Answer 12

Housing (or front-end) DTI is used to determine the borrower’s ability to pay all their monthly housing-related expenses. Typically, these housing expenses are tied to the borrower’s financial responsibilities for the home and include the PITI payment as well as homeowner’s fees. These expenses do NOT include utilities (e.g. heat and electricity). Front-end only includes things like the mortgage, taxes and insurance. In other words, what the borrower must pay so that the mortgage holder or the tax man doesn’t kick them out of the house. You can live in your house without electricity (even though it might be a little dark at night), but you can’t live there if the tax
collector seizes your home for not paying your property tax. These expenses are then compared to the borrower’s monthly gross income.

Question 13

Housing DTI Calculation

Answer 13

Housing DTI Calculation

(PITI + Housing Expenses) ÷ Gross Monthly Income = Housing DTI

Question 14

Total DTI

Answer 14

Total (or back-end) DTI is used to consider all of the borrower’s non-cancellable monthly debt obligations,
including their housing-related expenses, to their gross monthly income. Non-cancellable debts include loan payments (such as car and student loans), credit card payments and other miscellaneous items. The key is
that they cannot be canceled. If the debt can be canceled it should not be included in the calculation. Even though the borrower might regularly spend money on things like food and utilities each month, they are not considered part of the Total DTI.

Question 15

Total DTI Calculation

Answer 15

Total DTI Calculation
Total Monthly Expenses ÷ Gross Monthly Income = Total DTI

One last note about total DTI: When calculating total DTI for Fannie and Freddie loans a minimum of 5% of total revolving debt must be included in the monthly debt calculation if no monthly minimum payment is listed.

Question 16

Income

Answer 16

Gross income is always used in mortgage calculations

Question 17

Common types of income documentation required for each employment type:

Answer 17

1. Salary: 2 years W2s, 30-60 days worth of pay stubs
2. Independent Contractor: 2 years 1099s
3. Passive Income (social security/retirement): award letters, bank statements
4. Self Employed/Commission: 2 years tax returns

No matter how you are employed, all borrowers will also have to sign a 4506-C. This allows for the lender to go to the IRS and get a transcript of the borrower’s tax returns.

Question 18

Down Payment

Answer 18

The down payment is a requirement of the lender and the loan program provider as part of getting a mortgage.

Question 19

Down Payment Calculation

Answer 19

Down Payment Calculation #1
Appraised Value/Purchase Price - Loan Amount = Down Payment

Down Payment Calculation #2
Appraised Value/Purchase Price x % Down = Down Payment

Question 20

Loan to Value (LTV) Calculation

Answer 20

LTV Calculation

Loan Amount ÷ Appraised Value/Purchase Price = LTV

Question 21

Combined Loan To Value (Total Loan To Value)

Answer 21

The amount of all of the borrower’s mortgages or liens compared to the home’s value.

May also be described as total loan to value (TLTV). Fannie Mae uses CLTV while Freddie Mac uses TLTV.

Question 22

Combined Loan To Value (Total Loan To Value) Calculation

Answer 22

CLTV (TLTV) Calculation
1st Loan Amount + All Loan Amounts = Total Loan Amount Total Loan Amount ÷ Appraisal Value/Purchase Price = CLTV/TLTV

Example Of CLTV:
Kenisha wants to get a refinance with a primary mortgage of
$150,000, a second mortgage of $50,000, and a third mortgage of
$25,000. Her appraised value is $300,000. Her CLTV is 75%.
$150,000 + $50,000 + $25,000 = $225,000 (total of loan balances)
$225,000 ÷ $300,000 = 75% (CLTV / TLTV)

Question 23

High Combined Loan To Value (High Total Loan To Value)

Answer 23

HCLTV is used when a home equity line of credit (HELOC) is involved in the transaction. Rather than use the HELOC’s current balance (like we would do with CLTV) we would replace that balance with the borrower’s maximum limit on the HELOC.

Question 24

High Combined Loan To Value (High Total Loan To Value) Calculation

Answer 24

HCLTV (HTLTV) Calculation
All Loan Balances (on close-ended loans) + Credit Limit On HELOCs
÷ Appraisal Value/Purchase Price = HCLTV/HTLTV

Example Of HCLTV:
Let’s build on the previous equation with Kenisha as an example and assume that her third mortgage is a HELOC. Kenisha has a primary mortgage of $150,000, a second mortgage of $50,000, and a third mortgage HELOC with a balance of $25,000 and a maximum limit of $40,000 and her appraised value is $300,000. Her HCLTV is 80%.
$150,000 + $50,000 + $40,000 = $240,000
(Combination of loan balances, except the HELOC where we use the maximum limit instead of the loan balance)
$240,000 ÷ $300,000 = 80% (HCLTV / HTLTV)