Tennessee Realtor State Practice Exam

What is a common requirement for conventional loans involving private mortgage insurance?

1. A 10% down payment.

2. A 15% down payment.

3. A down payment less than 20% of the purchase price.

4. The borrower's credit score.

The correct answer is: A down payment less than 20% of the purchase price.

A common requirement for conventional loans involving private mortgage insurance (PMI) is a down payment that is less than 20% of the purchase price. When a borrower makes a down payment of less than 20%, lenders typically require PMI to protect themselves against the risk of default. PMI reduces the lender's exposure in case the borrower fails to make the mortgage payments, thus providing an added layer of security. In this context, a down payment of less than 20% indicates that the borrower is utilizing financing options that come with additional risk for the lender, hence necessitating PMI. With a down payment of 20% or more, the borrower is often perceived as less risky, and PMI is generally not required. This standard practice is designed to facilitate homeownership by allowing buyers to enter the market even if they do not have a substantial amount of savings for a down payment. The other options present thresholds or criteria that do not accurately encapsulate the requirement for PMI in conventional loans. While credit scores can influence loan terms and eligibility, they don't directly relate to the PMI requirement, making the focus on the down payment amount crucial in this scenario.