Difficulty: Hard

Average Score: 40%

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.

Private mortgage insurance (PMI) protects lenders against losses if borrowers default on loans with low down payments. When buyers invest less than 20%, they are considered higher risk, prompting lenders to require PMI to mitigate potential financial losses.

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

While having reserves can strengthen a buyer’s application, lenders typically do not mandate a specific amount in a certificate of deposit when a down payment is below 20%. This requirement is more common in certain loan programs, but it does not serve as a universal standard for low down payment situations.

B (a certificate of reasonable value) YOUR ANSWER

A certificate of reasonable value is primarily associated with VA loans to ensure that the loan amount does not exceed the appraised value of the property. This document is not a standard requirement for conventional loans with less than a 20% down payment and does not address the risk factors associated with low equity situations.

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

While a high FICO score may enhance a buyer's chances of loan approval, there is no universal requirement for a minimum score of 745 specifically tied to down payments under 20%. Lenders may have varied credit score requirements based on their policies, but this choice does not directly relate to the need for PMI.

Conclusion

When buyers make a down payment of less than 20%, lenders typically require private mortgage insurance to safeguard against potential defaults. This requirement specifically addresses the increased risk associated with lower equity loans, ensuring that lenders have some form of protection. Other options, such as reserves, certificates of reasonable value, or specific credit score thresholds, do not universally apply in these situations and thus do not fulfill the lenders' primary risk management needs.

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