Question 12

A smaller down payment is required.

Private mortgage insurance (PMI) allows borrowers to secure a home mortgage loan with a smaller down payment, making homeownership more accessible for those who may not have sufficient savings for a larger initial investment.

A) The premium is typically paid by the seller.

This option is incorrect because PMI premiums are usually the responsibility of the borrower, not the seller. While seller concessions may occur in some transactions, they do not typically cover PMI costs.

B) A smaller down payment is required.

This option is correct as PMI enables borrowers to make a down payment of less than 20% of the home's purchase price. This feature is crucial for many first-time homebuyers who may lack substantial savings.

C) The full amount of the loan is insured.

This option is misleading. PMI does not insure the full amount of the loan; rather, it protects the lender against loss in case of default. The coverage typically ranges from 20% to 30% of the loan amount, depending on the loan type and down payment.

D) The loan is sold if the borrower dies.

This option is incorrect as PMI is not related to the sale of the loan upon the borrower's death. Instead, PMI functions as insurance for the lender and does not dictate the terms of the loan's management or transfer.

Conclusion

The correct answer, which highlights that a smaller down payment is required, is vital for borrowers seeking to enter the housing market without substantial upfront costs. Other options fail to capture the primary benefit of PMI, which is its role in facilitating lower down payments and making homeownership attainable for more individuals.