01
DTI — Debt-to-Income Ratios
DTI is the most fundamental mortgage math calculation. There are two ratios — front-end (housing only) and back-end (all debt). Fannie Mae and Freddie Mac use the back-end ratio as the primary qualifying test.
Front-End DTI (Housing Ratio)
Front-End DTI = PITI ÷ Gross Monthly Income
PITI = Principal + Interest + Taxes + Insurance (+ PMI if applicable)
General guideline: 28–31% front-end
General guideline: 28–31% front-end
Back-End DTI (Total Debt Ratio)
Back-End DTI = (PITI + All Monthly Debts) ÷ Gross Monthly Income
All debts = car, credit cards (minimum payment), student loans, other mortgages
Conventional max: 45% standard (50% with strong AUS)
Conventional max: 45% standard (50% with strong AUS)
🧮 DTI Calculator
Results
📝 Worked Example — DTI Calculation
Maria earns $6,500/month gross. Proposed PITI = $1,750. Car payment = $380. Credit card minimum = $120. Student loan = $200. Does she qualify for a conventional conforming loan at 45% back-end DTI?
- Total monthly debts (non-housing): $380 + $120 + $200 = $700
- Total monthly obligations: $1,750 (PITI) + $700 = $2,450
- Back-end DTI: $2,450 ÷ $6,500 = 0.377 = 37.7%
- Front-end DTI: $1,750 ÷ $6,500 = 0.269 = 26.9%
- Compare to limit: 37.7% back-end < 45% maximum ✓
✅ Maria QUALIFIES — 37.7% back-end DTI is within the 45% standard conforming limit.
⚠️ Common Exam Traps — DTI
- Use gross income — never net/take-home pay for DTI calculations
- Credit card minimum payment counts — not the full balance
- Student loans in deferment — must still be counted (1% of balance if payment unknown)
- Child support/alimony paid OUT counts as a debt; received comes in as income
- Max PITI available = (Max DTI% × Gross Income) − Other Debts
02
LTV & CLTV
LTV (Loan-to-Value) measures a single loan against the property value. CLTV (Combined LTV) measures all loans against the property value. Both are critical for PMI, pricing, and Texas 50(a)(6) compliance.
LTV Formula
LTV = Loan Amount ÷ LOWER of (Appraised Value OR Purchase Price)
Always use the LOWER number. If appraisal = $400K and price = $375K → use $375K
CLTV Formula
CLTV = (All Liens Combined) ÷ Appraised Value
Includes: 1st mortgage + 2nd mortgage + HELOC. Used for Texas 50(a)(6) max 80% CLTV test.
🧮 LTV / CLTV Calculator
| LTV | Down Payment | PMI Required? | Notes |
|---|---|---|---|
| 97% | 3% | YES | HomeReady / Home Possible only. Income limits apply. |
| 95% | 5% | YES | Standard conventional minimum (without special programs) |
| 90% | 10% | YES | FHA: LTV >90% → MIP for LIFE of loan |
| 80% | 20% | NO | No PMI required at origination. Borrower can REQUEST PMI cancellation at this level. |
| 78% | 22% | AUTO-CANCEL | PMI automatically cancelled under HPA (original value, original schedule) |
03
Qualifying Income Calculations
Different income types are treated differently for qualifying. The exam tests how to calculate usable income from various sources.
| Income Type | How to Calculate | Documentation |
|---|---|---|
| W-2 Hourly | Hourly rate × Hours/week × 52 ÷ 12 = Monthly income | 2 years W-2s + recent pay stubs |
| W-2 Salary | Annual salary ÷ 12 = Monthly income | 2 years W-2s + recent pay stubs |
| Overtime/Bonus | Average of 2 years if likely to continue (same employer) | 2 years W-2s showing consistent history |
| Self-Employed | Average of 2 years net income from tax returns | 2 years personal + business tax returns + YTD P&L |
| Rental Income | 75% of gross monthly rent (vacancy/expense factor) | Lease agreements + 2 years tax returns (Schedule E) |
| Social Security | Monthly benefit amount (may gross up 125% if non-taxable) | Award letter + recent bank statements |
| Child Support/Alimony IN | Monthly amount received — must have 3+ years remaining | Divorce decree + 12 months of payment history |
🧮 Qualifying Income Calculator
📝 Worked Example — Self-Employed Income
Carlos is self-employed (35% owner). His tax returns show: Year 1 net income = $72,000. Year 2 net income = $84,000. What monthly income can be used for qualifying?
- He owns 35% → treated as self-employed (threshold = 25%+)
- Average 2 years: ($72,000 + $84,000) ÷ 2 = $78,000/year
- Monthly qualifying income: $78,000 ÷ 12 = $6,500/month
✅ Qualifying income = $6,500/month based on 2-year average
📝 Worked Example — Rental Income
Sarah owns a rental property. Gross monthly rent = $2,400. The rental property PITI = $1,600/month. How much net rental income can be used for qualifying?
- Apply 75% factor: $2,400 × 75% = $1,800 usable rental income
- Rental property PITI = $1,600 (already counted in debts)
- Net rental income contribution: $1,800 − $1,600 = $200/month positive income
✅ $200/month can be added to qualifying income. If 75% rent < PITI, the difference is a monthly debt.
04
PMI — Threshold & Cancellation Math
When PMI is Required
PMI required when: Loan Amount ÷ Value > 80% (LTV > 80%)
Minimum 20% down = no PMI at origination
PMI cancellation request: when balance reaches 80% of ORIGINAL purchase price
PMI automatic cancel: when balance reaches 78% of ORIGINAL purchase price per original amortization schedule
PMI cancellation request: when balance reaches 80% of ORIGINAL purchase price
PMI automatic cancel: when balance reaches 78% of ORIGINAL purchase price per original amortization schedule
🧮 PMI Threshold Calculator
🎯 PMI Numbers — Exam Critical
- PMI required: LTV > 80% (less than 20% down)
- Borrower can REQUEST cancellation: LTV reaches 80% of original value
- PMI automatically cancels: LTV reaches 78% of original value, original schedule
- Mandatory cancellation: at the loan midpoint regardless of LTV
- FHA MIP with original LTV >90%: lasts the LIFE OF THE LOAN — must refinance to cancel
05
Discount Points & Break-Even
Discount points are prepaid interest. 1 point = 1% of the loan amount. Paying points lowers the interest rate. The break-even calculation tells borrowers how long they need to keep the loan for the points to pay off.
Cost of Points
Cost = Points% × Loan Amount
1 point on $300,000 = 1% × $300,000 = $3,000
Break-Even Period
Break-Even = Cost of Points ÷ Monthly Payment Savings
If $3,000 saves $40/month → $3,000 ÷ $40 = 75 months (6.25 years)
🧮 Points & Break-Even Calculator
📝 Worked Example — Should She Pay Points?
Linda is buying a $400,000 home with a $320,000 loan. Without points: 7.0% rate, $2,129/month. With 2 points: 6.5% rate, $2,023/month. She plans to sell in 4 years. Should she pay points?
- Cost of 2 points: 2% × $320,000 = $6,400
- Monthly savings: $2,129 − $2,023 = $106/month
- Break-even: $6,400 ÷ $106 = 60.4 months ≈ 5 years
- Linda plans to sell in 4 years (48 months) — before break-even (60 months)
❌ Linda should NOT pay points — she will sell before recovering the $6,400 cost. She loses money on the points.
06
Escrow Analysis
RESPA Section 10 governs escrow accounts. The maximum cushion a lender can hold is 2 months of projected escrow payments. Annual analysis is required.
Escrow Analysis Formula
Monthly Escrow Payment = (Annual Taxes + Annual Insurance) ÷ 12
Max Cushion = Monthly Escrow Payment × 2
Surplus = Actual Balance − (Expected Low Balance + Max Cushion)
If Surplus > 0 → lender must refund within 30 days or credit next payment
If shortage → lender can require repayment over 12 months
If shortage → lender can require repayment over 12 months
🧮 Escrow Analysis Calculator
📝 Worked Example — Escrow Surplus
Annual taxes = $5,400. Annual insurance = $1,200. Lender holds $2,800 in escrow at analysis date. Is there a surplus? What must the lender do?
- Monthly escrow needed: ($5,400 + $1,200) ÷ 12 = $6,600 ÷ 12 = $550/month
- Maximum 2-month cushion: $550 × 2 = $1,100
- Maximum allowable balance: $550 (next bill) + $1,100 (cushion) = $1,650
- Actual balance: $2,800. Surplus: $2,800 − $1,650 = $1,150 surplus
✅ Lender must refund $1,150 to the borrower within 30 days or credit it toward next payment. Keeping excess escrow violates RESPA Section 10.
07
TRID Fee Tolerance Calculations
TRID divides fees into three tolerance buckets. Knowing which bucket a fee falls into and whether a violation occurred is heavily tested math on the NMLS exam.
| Tolerance Type | Maximum Increase | Examples |
|---|---|---|
| Zero Tolerance | $0 — cannot increase at all | Origination charges, points, transfer taxes, fees for required services where borrower cannot shop |
| 10% Aggregate | 10% of TOTAL of all 10% category fees combined | Recording fees, fees for required services where borrower CAN shop from lender's list |
| Unlimited Tolerance | Can increase without limit | Prepaid interest, homeowner's insurance, services borrower shopped for independently |
🧮 TRID 10% Tolerance Violation Calculator
📝 Worked Example — Zero Tolerance Violation
The Loan Estimate shows origination fee of $1,200. The Closing Disclosure shows $1,450. No changed circumstance occurred. What is the cure amount?
- Origination fee = zero tolerance — cannot increase at all
- Increase: $1,450 − $1,200 = $250 increase
- Since zero tolerance, the ENTIRE increase is a violation
- Required cure: lender must refund $250 within 3 calendar years of closing
✅ Lender must cure by refunding $250 to borrower. Cure window = 3 calendar years from closing date.
08
Texas 50(a)(6) Math
Texas home equity math appears on virtually every Texas NMLS exam. Master these two calculations: maximum HELOC amount and maximum fee test.
Maximum Home Equity Loan Amount
Max Total Debt = 80% × Fair Market Value
Max HEL = Max Total Debt − Existing Liens
If Max Total Debt ≤ existing first mortgage → $0 available
3% Fee Cap Test
Max Allowed Fees = 3% × Original Loan Amount
Violation if: Actual Fees > Max Allowed Fees
Cure: lender has 60 days after written notice to refund excess fees
🧮 Texas 50(a)(6) Calculator
09
APR vs. Note Rate
The exam frequently tests the relationship between the note rate and APR. APR is always ≥ the note rate because it includes fees spread over the loan term.
| Included in APR | NOT Included in APR |
|---|---|
| ✅ Interest rate (note rate) | ❌ Appraisal fee |
| ✅ Origination fees & points | ❌ Title insurance premium |
| ✅ Mortgage insurance premiums (PMI/MIP) | ❌ Recording fees |
| ✅ Prepaid interest (per diem) | ❌ Transfer taxes |
| ✅ Certain broker fees | ❌ Homeowner's insurance |
| ✅ Loan discount fees | ❌ Survey fees |
💡 APR Advertising Rule — Exam Critical
- APR alone can be advertised without triggering all other disclosures
- If a specific interest rate is stated, APR must also appear with equal or greater prominence
- APR buried in a footnote next to a headline rate = TILA violation (not clear and conspicuous)
- ARM APR must disclose that the rate may increase after the fixed period
10
Exam Quick Reference — All Key Numbers
| Concept | Number | Context |
|---|---|---|
| Back-end DTI max | 45% | Standard conforming; 50% with strong AUS |
| QM points & fees cap | 3% | Of loan amount for loans ≥ $100,000 |
| QM max DTI | 43% | Standard non-GSE QM |
| PMI trigger | > 80% LTV | Less than 20% down on conventional |
| PMI request cancellation | 80% LTV | Based on original value, original schedule |
| PMI auto-cancel | 78% LTV | Based on original value, original schedule |
| Self-employed threshold | 25%+ | Ownership % that triggers self-employed docs |
| Rental income factor | 75% | Of gross rent used to offset rental PITI |
| Escrow cushion max | 2 months | RESPA Section 10 |
| 1 discount point | 1% of loan | Prepaid interest to buy down rate |
| Texas 50(a)(6) CLTV max | 80% | All liens ÷ fair market value |
| Texas 50(a)(6) fee cap | 3% | Of original principal amount |
| Texas 50(a)(6) waiting period | 12 calendar days | From application to closing |
| TRID LE delivery | 3 business days | From complete application receipt |
| TRID CD waiting period | 3 business days | Before consummation |
| TRID cure window | 3 calendar years | From closing to cure tolerance violations |
| QWR acknowledge | 5 business days | RESPA Section 6 |
| QWR response | 30 business days | Extendable to 45 with notice |
| ECOA adverse action | 30 days | From complete application |
| ECOA record retention | 25 months | From date of credit decision |
| TILA rescission period | 3 business days | Primary residence refinances only |
| TILA rescission extension | 3 years | If proper notice not given at closing |
| BSA SAR filing | 30 days | Extendable to 60 days |
| BSA CTR threshold | $10,000 cash | Currency Transaction Report |
| SCRA interest cap | 6% | Excess forgiven — not deferred |
| TX foreclosure notice | 21 days | Before trustee sale |
| TX foreclosure sale day | First Tuesday | 10 AM–4 PM at county courthouse |
| NMLS passing score | 75% | ≈ 86 correct out of 115 scored |
| TX pre-licensing hours | 23 hours | 20 federal + 3 Texas-specific |
| TX annual CE hours | 8 hours | 7 federal + 1 Texas-specific |
| Conforming loan limit | $766,550 | 2024, 1-unit standard area |
| High-cost conforming limit | $1,149,825 | 2024, 1-unit high-cost area (150% of baseline) |
| FHA upfront MIP | 1.75% | Of base loan amount |
| USDA upfront fee | 1% | Of loan amount, can be financed |
| USDA annual fee | 0.35% | Paid monthly |
| VA funding fee (1st use) | 2.15% | Regular military, 0% down, can be financed |