Question 34

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

When a buyer makes a down payment of less than 20%, most lenders will require private mortgage insurance (PMI) to protect themselves against the risk of default. This insurance provides a safeguard for the lender in case the borrower fails to repay the loan.

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

This option is incorrect because lenders do not typically require buyers to have one year's worth of reserves in a certificate of deposit when making a smaller down payment. While having reserves may strengthen a borrower's application, it is not a standard requirement in this context.

B) a certificate of reasonable value

A certificate of reasonable value is not a common requirement for buyers putting less than 20% down. This type of documentation is more relevant in specific scenarios such as VA loans, and it does not serve the same purpose as private mortgage insurance.

C) a FICO score of at least 745

Requiring a FICO score of at least 745 is not a universal standard for buyers with less than 20% down. While credit score requirements vary by lender, many will work with borrowers who have lower scores, so this option does not directly relate to the requirement of private mortgage insurance.

D) private mortgage insurance

This option is correct because private mortgage insurance is generally mandated by lenders when the down payment is less than 20%. PMI protects the lender in case of borrower default, making it an essential requirement in these situations.

Conclusion

Private mortgage insurance is the definitive requirement for borrowers putting down less than 20%, as it mitigates the lender's risk. Other options, while potentially related to financial readiness, do not specifically address the insurance requirement that arises from a lower down payment. Thus, option D clearly stands out as the correct answer.