New York Real Estate Salesperson ExaminationFinancingEasy
A buyer is securing a mortgage for a new home purchase. The lender requires private mortgage insurance (PMI) for the loan. Which of the following conditions most likely triggered this requirement?
- AThe buyer has a high debt-to-income ratio.
- BThe property is located in a high-risk flood zone.
- CThe interest rate on the mortgage is fixed for 30 years.
- DThe loan-to-value (LTV) ratio exceeds 80%.
Show answer & explanationAnswer & explanation
Correct answer: D. The loan-to-value (LTV) ratio exceeds 80%.
Private mortgage insurance (PMI) is typically required when a borrower makes a down payment of less than 20%, resulting in a loan-to-value (LTV) ratio greater than 80%. This protects the lender in case of borrower default.
Why the other options are wrong
- A. A high debt-to-income ratio affects loan approval but doesn't directly trigger PMI if the LTV is below 80%.
- B. Property location in a flood zone requires flood insurance, not private mortgage insurance.
- C. The type of interest rate (fixed or adjustable) does not directly determine the need for PMI.
Private Mortgage Insurance (PMI)
Insurance policy that protects the lender from losses if a borrower defaults on a mortgage loan, typically required when the down payment is less than 20% of the home's purchase price.
- Protects the lender, not the borrower.
- Required for conventional loans with LTV > 80%.
- Can often be cancelled once sufficient equity is built.
Memory trick: PMI protects the lender when your down payment is less than twenty.