California Real Estate Salesperson Exam Practice - Question 53

Question

Private mortgage insurance is required for residential mortgage loans if the loan-to-value ratio is in excess of:

Selections

A. 60%

B. 70%

C. 80%

D. 90%

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Answer: C

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5 Keys Summary

• Private mortgage insurance (PMI) is typically required for residential mortgage loans when the loan-to-value (LTV) ratio exceeds 80%.

• This insurance requirement applies when the borrower pays a down payment that is less than 20% of the property’s value.

• The primary purpose of PMI is to safeguard the lending institution (conventional lenders) against financial loss should the borrower default on the mortgage loan.

• Mortgage insurance enables residential borrowers to obtain loans with higher LTV ratios and smaller down payments, making loans with ratios in excess of 80% require coverage.

• Loans secured by 1 to 4 family dwellings that have loan-to-value ratios above 80 percent must carry private mortgage insurance coverage.

Explanations

Private mortgage insurance (PMI) is generally required for conventional residential mortgage loans when the loan-to-value (LTV) ratio is 80% or higher, meaning the borrower's down payment is less than 20% of the property's value. This insurance protects the funding lender from the risk of default. PMI differs from the Mortgage Insurance Premium (MIP) associated with FHA loans and is not required for VA loans. Under the federal Homeowners' Protection Act, a lender is supposed to remove the monthly PMI fee if the LTV for the first mortgage falls below 80%, for example, due to property appreciation or principal payments.

Concepts Definitions

Private Mortgage Insurance (PMI): Mortgage guarantee insurance that protects conventional lenders in case of a borrower's default, with the premiums typically paid by the borrower. It is applied to loans where the loan-to-value ratio exceeds 80%.

Loan-to-Value (LTV) Ratio: A financial ratio that compares the amount of the mortgage loan to the appraised value or purchase price of the property, whichever is lower.

Conventional Loan: A type of mortgage loan that is not insured or guaranteed by a governmental agency, such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA).

FHA Loans: Residential mortgage loans insured by the Federal Housing Administration, which typically allow for lower down payments (e.g., 3.5%) but require mortgage insurance premiums (MIP).

VA Loans: Home mortgage loans partially guaranteed by the U.S. Department of Veterans Affairs, which can offer 100% financing (no down payment) and do not require mortgage insurance.

Default: The failure to fulfill the terms of a loan agreement, most commonly by missing required mortgage payments.

Homeowners' Protection Act: A federal law that provides for the automatic termination of private mortgage insurance (PMI) when a borrower's loan-to-value (LTV) ratio reaches certain thresholds, typically below 80%.