For a conventional loan, when is private mortgage insurance (PMI) required?

For a conventional loan, when is private mortgage insurance (PMI) required?

• A. Less than 80%
• B. Less than 75%
• C. More than 80%
• D. More than 75%

Answer: (C)

Private mortgage insurance (PMI) is required for conventional loans when the borrower is financing more than 80% of the home's value. This means that if the loan-to-value (LTV) ratio exceeds 80%, the lender has more risk since the borrower has less equity in the property. PMI serves as a safeguard for lenders against the risk of potential default, allowing them to provide loans to borrowers who may not have the traditional 20% down payment. When LTV is at or below 80%, the borrower is considered to have sufficient equity, which reduces the lender's risk and eliminates the need for PMI. This is why it is crucial for borrowers to strive for a down payment that allows them to avoid PMI, as it can add a significant monthly cost to their mortgage payment. Thus, understanding the implications of LTV ratios in relation to PMI is essential for effective financial planning when obtaining a conventional loan.

Private mortgage insurance (PMI) is required for conventional loans when the borrower is financing more than 80% of the home's value. This means that if the loan-to-value (LTV) ratio exceeds 80%, the lender has more risk since the borrower has less equity in the property. PMI serves as a safeguard for lenders against the risk of potential default, allowing them to provide loans to borrowers who may not have the traditional 20% down payment.

When LTV is at or below 80%, the borrower is considered to have sufficient equity, which reduces the lender's risk and eliminates the need for PMI. This is why it is crucial for borrowers to strive for a down payment that allows them to avoid PMI, as it can add a significant monthly cost to their mortgage payment. Thus, understanding the implications of LTV ratios in relation to PMI is essential for effective financial planning when obtaining a conventional loan.