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

Rationale

Most lenders would require private mortgage insurance if the buyer is putting less than 20% down.

When a buyer makes a down payment of less than 20%, lenders typically require private mortgage insurance (PMI) to protect themselves against the risk of default. PMI serves as a safeguard for lenders, allowing them to mitigate potential losses when the borrower has a smaller equity stake in the property.

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

This option refers to a type of asset verification that some lenders may consider for financial stability, but it is not a standard requirement for buyers with low down payments. Lenders focus on ensuring that borrowers can cover mortgage payments and related costs; however, this doesn’t specifically address the need for PMI when the down payment is under 20%.

B (a certificate of reasonable value) YOUR ANSWER

A certificate of reasonable value is often associated with VA loans to establish the property's value for loan approval, but it is not a requirement linked to down payment size. While necessary for certain loan types, it does not directly relate to the need for PMI in the context of conventional loans.

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

While a high credit score can improve loan terms and approval chances, it is not a strict requirement for buyers putting less than 20% down. Different lenders have varying credit score requirements, but PMI is specifically tied to the down payment amount rather than the borrower's credit standing.

Conclusion

When buyers make a down payment of less than 20%, lenders typically mandate private mortgage insurance to mitigate their risk. While there are various requirements associated with obtaining a mortgage, such as credit scores and asset verification, PMI is uniquely tied to the equity position of the borrower. Understanding these requirements is crucial for potential buyers to navigate their financing options effectively.

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