Question 82

Private mortgage insurance is typically required when the down payment is less than 20%.

When a borrower makes a down payment of less than 20% on a home, lenders commonly require private mortgage insurance (PMI) to protect against the risk of default. This insurance helps the lender recover losses if the borrower fails to repay the loan.

A) one year's reserves in CD

This option is incorrect as lenders do not typically require one year's reserves in a Certificate of Deposit (CD) when the down payment is less than 20%. While having reserves can strengthen a borrower's application, it is not a standard requirement.

B) certificate of reasonable value

A certificate of reasonable value is not a requirement for loans with down payments under 20%. This document is more relevant for certain types of loans, such as VA loans, and does not pertain to the general requirement of PMI.

C) FICO ≥745

While a higher FICO score can improve a borrower's chances of obtaining a mortgage, it is not a specific requirement if the down payment is less than 20%. Lenders may have varying credit score requirements, but PMI is the standard measure enforced in this scenario.

D) private mortgage insurance

Private mortgage insurance is indeed required by most lenders when the down payment is less than 20%. PMI protects the lender's investment and allows borrowers to qualify for loans with smaller down payments.

Conclusion

Private mortgage insurance is the definitive requirement when a down payment is below 20%, as it mitigates the lender's risk. Other options, such as reserves, certificates, or credit score thresholds, do not directly address the necessity of insurance in this context. Therefore, option D is the correct answer, fulfilling the standard lender requirement in such situations.