Underwriting, PMI & Closing

~11 min read · Track LTV, PMI, discount points and the path from application to funding.

From pre-approval to funding, the lending process is a sequence of gates: ratios and LTV at qualification, appraisal and title in processing, and the closing table's cash mechanics. The exam samples the math — LTV, PITI ratios, points — and the vocabulary of each gate.

Qualification math

LTV = loan ÷ lesser of price or appraised value — it sets PMI (above 80% conventional), pricing, and program fit. Income tests: front-end ratio (PITI ÷ gross monthly income, benchmark ~28% conventional / 31% FHA) and back-end (PITI + recurring debts ÷ income, ~36% / 43%). Pre-qualification is an estimate from stated data; pre-approval follows verification and underwriting — the one with weight under an offer.

  • LTV off the LESSER of price or value
  • 28/36 conventional, 31/43 FHA benchmarks
  • Pre-approval (verified) ≫ pre-qualification (stated)

Points, buydowns, and lock

Discount points: 1 point = 1% of the loan amount, buying the rate down (rule of thumb ~1/4% per point, per the day's pricing). Origination fees compensate the lender regardless. Rate locks fix pricing for a window; float-downs are negotiated features. Buydowns (2-1) subsidize early payments from an upfront deposit — qualification still runs at the note rate. Every prepaid finance charge nudges APR above the note rate, which is what makes APR the comparison tool.

  • Point = 1% of LOAN; buys ~0.25% rate
  • Locks freeze pricing for a term
  • APR > note rate whenever points/fees exist

Processing to funding

Processing assembles verifications; the appraisal protects collateral value; title search + lender's title policy protect the lien; underwriting issues conditions, then clear to close. Closing: the borrower brings verified funds, signs note and security instrument, and — on owner-occupied refinances — retains the TILA rescission right. Recording perfects the lien; funding disburses. Post-closing, servicing (and the loan itself) may transfer with notice — terms never change with the servicer.

Worked example

Price $450,000; appraisal $440,000. The buyer wants the smallest down payment that avoids PMI, and asks what 2 discount points would cost on the resulting loan. Gross income is $9,500/month; existing debts $600/month. Check the numbers, including whether she can afford the ~$2,850 PITI at the bought-down rate.

PMI-free means LTV ≤ 80% — computed on the LESSER of price or value: 80% × $440,000 = $352,000 max loan, so cash to price is $450,000 − $352,000 = $98,000 down (the $10,000 appraisal gap lands entirely on the buyer). Points: 2% × $352,000 = $7,040. Ratios at $2,850 PITI: front = 2,850 ÷ 9,500 = 30% (over the 28 benchmark, FHA-range acceptable); back = (2,850 + 600) ÷ 9,500 = 36.3% — right at the conventional line; automated underwriting with reserves likely clears it. Three exam staples in one file: lesser-of-price-or-value LTV, points on the LOAN amount, and both ratios computed on gross monthly income.

Common exam pitfalls

Computing the 80% on the purchase price.

LTV runs on the lesser of price or appraisal — a low appraisal raises the required down payment dollar-for-dollar.

Charging points against the price.

Points are a percentage of the LOAN amount.

Weighing a pre-qual letter like a pre-approval.

Pre-qualification is unverified arithmetic; pre-approval is underwritten — only the latter carries offer weight.

Lesser-of for LTV, loan-not-price for points, gross-monthly for ratios — the three denominators that decide everything.

Recap

  • LTV = loan ÷ lesser of price or value; >80% conventional = PMI
  • Front 28/back 36 conventional; 31/43 FHA
  • Point = 1% of loan ≈ 0.25% of rate
  • Pre-approval is verified; pre-qualification is not
  • Appraisal, title, underwriting → clear to close → record → fund
  • Servicing transfers change the address, never the terms

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