Question 12

A loan with an LTV of 80% or lower

Choosing a loan with a loan-to-value (LTV) ratio of 80% or lower allows a buyer to avoid paying private mortgage insurance (PMI). This is because lenders typically do not require PMI for loans where the borrower makes a down payment of at least 20%.

A) a loan with an LTV of 80% or lower

This option is correct because conventional lenders usually waive the requirement for PMI when the borrower has an LTV of 80% or lower. By making a down payment of 20% or more, the buyer effectively reduces the lender's risk, which eliminates the need for PMI.

B) a budget loan with a 10% down payment

This option is incorrect because a budget loan with only a 10% down payment results in an LTV of 90%. Since this ratio exceeds 80%, PMI would be required, contradicting the goal of avoiding it.

C) a package mortgage, which requires an LTV of 86%

This option is incorrect as well because an LTV of 86% indicates that the borrower is putting down only 14%. This does not meet the necessary criteria to avoid PMI, as the LTV is above the 80% threshold.

D) an ARM, which starts at 95% LTV then adjusts after 5 years

This option is also incorrect because beginning with an LTV of 95% means the borrower is making only a 5% down payment. Such a high LTV will definitely require PMI, which is contrary to the intention of avoiding it.

Conclusion

The correct answer, a loan with an LTV of 80% or lower, is the only option that allows buyers to avoid PMI by ensuring they have sufficient equity in the property from the outset. All other options present higher LTV ratios, which necessitate PMI, thereby failing the objective of the question.