Difficulty: Easy

Average Score: 83%

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.

Lenders often require private mortgage insurance (PMI) when a borrower makes a down payment of less than 20% of the home's purchase price. PMI protects the lender in case the borrower defaults on the mortgage, as it mitigates the lender's risk associated with lower equity in the property.

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

While some lenders may request reserves to ensure that a borrower has sufficient funds to cover mortgage payments in case of financial hardship, this is not a standard requirement specifically tied to down payments below 20%. Reserves are generally evaluated on a case-by-case basis rather than a blanket requirement.

B (a certificate of reasonable value) YOUR ANSWER

A certificate of reasonable value (CRV) is associated with VA loans and reflects the appraised value of the property. It is not a requirement for conventional loans or related to the down payment percentage; therefore, it does not apply in the context of requiring PMI for lower down payments.

C (a FICO score of at least 745) YOUR ANSWER

While a good credit score, such as a FICO score of 745, may be beneficial in securing favorable loan terms, it is not an absolute requirement for all lenders when a buyer makes a down payment of less than 20%. Different lenders have varying credit score requirements, and PMI is the key focus for down payments below 20%.

Conclusion

When buyers put down less than 20%, lenders commonly require private mortgage insurance to offset the risk associated with lower equity. The other options mentioned are either not standard requirements or pertain to different aspects of the lending process, making PMI the essential safeguard for lenders in such scenarios.

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