Tennessee Realtor State Practice Exam

Why might a lender require private mortgage insurance from a borrower with a $50,000 down payment on a conventional loan?

1. The down payment is less than 15% of the purchase price.

2. The down payment is insufficient to meet 20% of the purchase price.

3. The borrower has poor credit history.

4. The property is in a high-risk area.

The correct answer is: The down payment is insufficient to meet 20% of the purchase price.

A lender may require private mortgage insurance (PMI) when the borrower’s down payment is less than 20% of the purchase price. In this scenario, the borrower has made a $50,000 down payment, which may not reach the 20% threshold, depending on the total purchase price of the home. This requirement is in place to protect the lender in case the borrower defaults on the loan, as a smaller down payment implies a higher risk for the lender. PMI helps to mitigate that risk by providing insurance coverage for the lender against potential losses. In this case, the down payment is considered insufficient to meet the 20% requirement, which is why the lender would necessitate private mortgage insurance. This policy is standard practice when borrowers finance a larger portion of the home’s purchase price, aiming to safeguard the lender's investment.