Difficulty: Hard

Average Score: 25%

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 in case the borrower defaults on the loan, particularly when the down payment is less than 20%. This requirement is a risk management strategy employed by lenders to mitigate potential losses associated with lower equity in the property.

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

This option refers to a financial reserve requirement that some lenders might consider, but it is not a standard requirement when a buyer is putting less than 20% down. While having reserves can demonstrate financial stability, it does not directly address the additional risk associated with a lower down payment.

B (a certificate of reasonable value) YOUR ANSWER

A certificate of reasonable value is typically associated with VA loans and verifies that the property's value meets the purchase price. It is not a blanket requirement for all lenders or situations where the down payment is less than 20%. Thus, it does not serve the same purpose as PMI in protecting lenders against borrower default.

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

While a high FICO score can be advantageous for securing favorable loan terms, it is not a universal requirement when making a down payment of less than 20%. Lenders often have varied credit score criteria, and many will consider lower scores under certain conditions, especially in conjunction with PMI.

Conclusion

When a buyer makes a down payment of less than 20%, lenders typically require private mortgage insurance to safeguard their investment against potential borrower default. This requirement reflects the increased risk associated with low equity, while the other options presented do not address the necessity of risk management in lending practices. Understanding these requirements is crucial for buyers aiming to secure financing while minimizing additional costs.

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