Question 91

Private mortgage insurance is typically required for buyers putting less than 20% down.

When a buyer puts down less than 20% of the home's purchase price, lenders commonly require private mortgage insurance (PMI) to protect themselves against potential default. PMI reduces the lender's risk, allowing more buyers to qualify for loans with lower down payments.

A) one year's worth of reserves in a certificate of deposit

This option is incorrect as lenders do not generally require one year's worth of reserves in a certificate of deposit for buyers making a smaller down payment. While having reserves can be beneficial, it is not a standard requirement related to down payment percentages.

B) a certificate of reasonable value

A certificate of reasonable value is not a typical requirement for buyers putting less than 20% down. This document is often associated with VA loans to ensure property value aligns with the loan amount, but it does not address the down payment percentage directly.

C) a FICO score of at least 745

While having a high FICO score can enhance a buyer's chances of loan approval and potentially influence the terms offered, it is not a strict requirement for those putting less than 20% down. Lenders may accept lower scores depending on other factors.

D) private mortgage insurance

This is the correct answer, as private mortgage insurance (PMI) is a common requirement when a buyer makes a down payment of less than 20%. PMI protects lenders in case the borrower defaults on the loan, making it a standard practice in the mortgage industry.

Conclusion

Private mortgage insurance is essential for lenders when a buyer's down payment is less than 20%, as it mitigates the risk associated with lower equity in the property. The other options do not directly address the specific requirements that lenders enforce for low down payment scenarios, making them less relevant in this context. Therefore, D is the definitive choice based on standard lending practices.