Question 11

Lenders would require private mortgage insurance if the buyer is putting less than 20% down.

When a buyer makes a down payment of less than 20%, most lenders typically require private mortgage insurance (PMI) to protect themselves against the risk of default. This insurance allows the lender to recover some of their losses if the borrower fails to repay the mortgage.

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

This option is incorrect because while having reserves can be beneficial for a borrower, it is not a standard requirement by lenders when the down payment is less than 20%. Lenders primarily focus on PMI in such cases to mitigate their risk.

B) a certificate of reasonable value

A certificate of reasonable value is typically associated with VA loans and is not a common requirement across all lenders for buyers putting less than 20% down. Thus, this option does not address the general lending requirements applicable to conventional loans.

C) a FICO score of at least 745

While a higher credit score can benefit a borrower in terms of loan approval and interest rates, it is not a strict requirement for all lenders when the down payment is below 20%. Therefore, this option does not accurately reflect the typical conditions imposed by lenders.

D) private mortgage insurance

This option is correct because private mortgage insurance is a common requirement for borrowers who make a down payment of less than 20%. PMI protects the lender in case the borrower defaults on the loan, making it a crucial element in such lending scenarios.

Conclusion

Private mortgage insurance is a fundamental requirement for lenders when buyers put down less than 20% because it minimizes the lender's risk. The other options do not directly address the standard requirements imposed under these circumstances, making them less relevant in this context. Therefore, option D stands out as the definitive answer.