Difficulty: Easy

Average Score: 88%

What would most lenders require if the buyer is putting less than 20% down?

Rationale

Private mortgage insurance is typically required if the buyer is putting less than 20% down.

When a buyer makes a down payment of less than 20% on a home, lenders often require private mortgage insurance (PMI) to mitigate their risk. PMI protects the lender in case the borrower defaults on the loan, making it a common requirement for lower down payment scenarios.

A (one year’s worth of reserves in a certificate of deposit) YOUR ANSWER

While having reserves can be beneficial for a borrower, lenders do not typically require a year’s worth of reserves in a certificate of deposit (CD) for buyers putting less than 20% down. Reserves may help demonstrate financial stability, but they are not a standard requirement for low down payment loans.

B (certificate of reasonable value) YOUR ANSWER

A certificate of reasonable value is primarily associated with VA loans and serves to establish the appraised value of a property. It is not a requirement for all buyers making a down payment of less than 20%, and thus does not apply universally to all low down payment situations.

C (FICO score of at least 745) YOUR ANSWER

While credit scores are important for loan approval, a FICO score of at least 745 is not a universal requirement for buyers putting less than 20% down. Lenders may accept lower scores depending on other factors, such as the overall financial profile of the borrower and the type of loan being obtained.

Conclusion

In summary, private mortgage insurance (PMI) is the primary requirement for buyers who make a down payment of less than 20%, serving as a safeguard for lenders against potential losses. Other options, such as reserves, certificates of value, and specific credit score thresholds, are either situational or not standard requirements, making PMI the key factor in this context.

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