Question 4

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, most lenders require private mortgage insurance (PMI) to protect the lender in case of default. This is a common practice to mitigate the increased risk associated with lower down payments.

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

Requiring one year's worth of reserves in a certificate of deposit is not standard practice for lenders when buyers put down less than 20%. While lenders may consider a buyer's reserves as part of the overall financial assessment, this requirement is not universally applicable and does not directly address the need for insurance on lower down payments.

B) a certificate of reasonable value

A certificate of reasonable value is typically associated with VA loans and not a general requirement for all loans when a buyer puts down less than 20%. This option does not pertain to the risk management practices lenders utilize when evaluating down payment amounts.

C) a FICO score of at least 745

While a higher FICO score can improve a buyer's chances of securing a loan, it is not a strict requirement for those putting less than 20% down. Lenders assess a range of factors, including credit scores, but PMI is specifically tied to the down payment amount rather than a specific credit score threshold.

D) private mortgage insurance

Private mortgage insurance is a common requirement for buyers who put down less than 20% of the purchase price. PMI protects the lender by covering a portion of the loan in case the borrower defaults, thus mitigating the risk associated with lower equity in the home.

Conclusion

Private mortgage insurance is essential for lenders to protect their investment when a buyer has a smaller down payment, making D the correct answer. Other options do not directly address the requirements related to lower down payments and thus fail to meet the core concept being tested.