Question 85

Lenders typically 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 will require private mortgage insurance (PMI) to protect themselves from the increased risk of default. This insurance helps cover the lender's losses 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 a year’s worth of reserves in a certificate of deposit specifically when the down payment is less than 20%. While having reserves may be beneficial for demonstrating financial stability, it is not a standard requirement for this scenario.

B) certificate of reasonable value

A certificate of reasonable value is not a universal requirement for buyers with less than a 20% down payment. This document is often relevant in specific loan programs, such as VA loans, but it does not address the general practice of requiring PMI for lower down payments.

C) FICO score of at least 745

While a strong credit score is advantageous and can impact loan terms, a FICO score of at least 745 is not a typical requirement when a buyer puts less than 20% down. Lenders may have different criteria for credit scores, but PMI is the primary concern in this context.

D) private mortgage insurance

This option is correct because most lenders will require private mortgage insurance (PMI) when the buyer's down payment is below 20%. PMI mitigates the risk to the lender by providing insurance coverage in case of borrower default.

Conclusion

Private mortgage insurance is a critical requirement for buyers who put less than 20% down, as it safeguards lenders against potential losses. The other options do not align with standard lending practices for low down payments, making them incorrect in this context. Therefore, option D is the definitive answer reflecting common lender requirements.