California Real Estate Broker ExaminationFinancingMedium
A buyer has secured a mortgage with a loan-to-value (LTV) ratio of 90%. Due to this high LTV, the lender requires the borrower to obtain private mortgage insurance (PMI). Which of the following statements about PMI is most accurate?
- APMI is a government-backed insurance program for low-income borrowers.
- BPMI premiums are usually paid as an upfront lump sum at closing.
- CPMI protects the borrower in case of default on the loan.
- DPMI is typically required when the borrower's down payment is less than 20% of the home's purchase price.
Show answer & explanationAnswer & explanation
Correct answer: D. PMI is typically required when the borrower's down payment is less than 20% of the home's purchase price.
Private mortgage insurance (PMI) is typically required by lenders when a borrower's down payment is less than 20% of the home's purchase price, meaning the loan-to-value (LTV) ratio is greater than 80%. It protects the lender, not the borrower, against losses if the borrower defaults.
Why the other options are wrong
- A. PMI is private insurance, not government-backed. Government-backed loans (like FHA) have their own mortgage insurance (MIP).
- B. While some PMI can be paid upfront, it's most commonly paid as a monthly premium added to the mortgage payment.
- C. PMI protects the lender, not the borrower, from losses if the borrower defaults.
Private Mortgage Insurance (PMI)
An insurance policy that protects lenders against losses that result from defaults on home mortgages.
- Required when LTV exceeds 80% (down payment less than 20%).
- Paid by the borrower, protects the lender.
- Can often be canceled once sufficient equity is built (e.g., LTV reaches 80% or 78%).
Memory trick: PMI Protects My Investment (Lender's).