Difficulty: Easy

Average Score: 100%

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 helps mitigate the lender's risk by providing insurance coverage in case the borrower fails to repay the loan.

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

This option refers to a financial reserve that some lenders might require, but it is not standard for loans with less than 20% down. While having reserves can strengthen a buyer's application, it is not a primary requirement in most cases related to low down payments.

B (a certificate of reasonable value) YOUR ANSWER

A certificate of reasonable value is often associated with VA loans and serves to establish a property's value for loan purposes. However, it is not a requirement for conventional loans where the buyer is putting less than 20% down. This choice does not address the risk concerns that lenders have with lower down payments.

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

While a strong credit score can improve a borrower's chances of loan approval and favorable terms, lenders do not universally require a FICO score of at least 745 for loans with less than 20% down. Many lenders have varying minimum credit score requirements, often lower than 745, making this option inaccurate for this scenario.

D (private mortgage insurance) CORRECT

PMI is typically required for borrowers who make a down payment of less than 20% on a conventional loan. This insurance protects the lender against potential losses if the borrower defaults, thus it is a common requirement in such cases, aligning with the risk management practices of lending institutions.

Conclusion

In summary, when buyers put down less than 20%, most lenders require private mortgage insurance to safeguard against the increased risk of default. Other options presented, while potentially relevant in different contexts, do not address the specific requirement predominantly associated with low down payment scenarios. Understanding PMI's role is crucial for buyers as they navigate financing options in real estate transactions.

Related Questions

View all