In which situation would a lender of a conventional loan require private mortgage insurance (PMI)?

In which situation would a lender of a conventional loan require private mortgage insurance (PMI)?

• A. Less than 80%
• B. Less than 75%
• C. More than 80%
• D. More than 75%

Answer: (C)

A lender typically requires private mortgage insurance (PMI) when the loan amount exceeds 80% of the property’s appraised value or sale price. This means that when a borrower makes a down payment of less than 20%, the lender views this as a higher risk for potential default, thus necessitating insurance to protect against that risk. When the loan amount is more than 80%, it indicates a higher leverage on the property, which means the buyer has invested less equity. PMI is a safeguard for the lender in such cases as it compensates them in the event of a loan default, thereby justifying the requirement for PMI in these high-risk situations. Conversely, if the loan amount is 80% or less, the lender may feel confident enough that the buyer has a sufficient equity cushion and consequently may not require PMI, prioritizing a lower risk scenario.

A lender typically requires private mortgage insurance (PMI) when the loan amount exceeds 80% of the property’s appraised value or sale price. This means that when a borrower makes a down payment of less than 20%, the lender views this as a higher risk for potential default, thus necessitating insurance to protect against that risk.

When the loan amount is more than 80%, it indicates a higher leverage on the property, which means the buyer has invested less equity. PMI is a safeguard for the lender in such cases as it compensates them in the event of a loan default, thereby justifying the requirement for PMI in these high-risk situations.

Conversely, if the loan amount is 80% or less, the lender may feel confident enough that the buyer has a sufficient equity cushion and consequently may not require PMI, prioritizing a lower risk scenario.