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.

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 provides coverage for the lender in case the borrower fails to repay the loan, making it a standard requirement for low down payment mortgages.

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

While having financial reserves can be beneficial and may improve a borrower's chances of loan approval, it is not a typical requirement for low down payment loans. Lenders focus primarily on the down payment percentage and the associated risks rather than specific reserve amounts in a certificate of deposit.

B (a certificate of reasonable value) YOUR ANSWER

A certificate of reasonable value is related to the appraisal process, often used in VA loans to confirm the property's value. However, it is not a standard requirement for all lenders or for buyers making less than a 20% down payment. The focus here is on borrower risk rather than property valuation documentation.

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

While a higher FICO score can enhance a borrower’s eligibility for favorable loan terms, it is not universally required by all lenders when a buyer puts down less than 20%. Lenders typically have varying credit score requirements, and a score of 745 is quite high, making it an uncommon prerequisite specifically linked to down payment percentages.

Conclusion

In summary, when a buyer makes a down payment of less than 20%, lenders primarily require private mortgage insurance to mitigate their risk. Other options, such as reserves, certificates of reasonable value, or high credit scores, do not serve as standard requirements in this context. Understanding PMI's role is crucial for buyers to navigate financing options effectively.

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