In what scenario might a borrower need private mortgage insurance (PMI)?

In what scenario might a borrower need private mortgage insurance (PMI)?

• A. If their down payment is less than 10%
• B. If their down payment is less than 20% of the home's purchase price
• C. If their credit score is below 600
• D. If they are purchasing a second home

Answer: (B)

Private mortgage insurance (PMI) is typically required when a borrower makes a down payment of less than 20% of the home’s purchase price. This requirement is in place to protect lenders in case the borrower defaults on the loan. Since a smaller down payment indicates a higher risk to the lender, PMI serves as a safeguard, allowing borrowers to secure financing even when they cannot afford a substantial upfront payment. While some lenders might have specific criteria based on credit score or other factors, PMI is primarily linked to the size of the down payment rather than the borrower’s credit score or the purchase of a second home. Therefore, a down payment of less than 20% is the standard trigger for requiring PMI, making this scenario the correct answer.

Private mortgage insurance (PMI) is typically required when a borrower makes a down payment of less than 20% of the home’s purchase price. This requirement is in place to protect lenders in case the borrower defaults on the loan. Since a smaller down payment indicates a higher risk to the lender, PMI serves as a safeguard, allowing borrowers to secure financing even when they cannot afford a substantial upfront payment.

While some lenders might have specific criteria based on credit score or other factors, PMI is primarily linked to the size of the down payment rather than the borrower’s credit score or the purchase of a second home. Therefore, a down payment of less than 20% is the standard trigger for requiring PMI, making this scenario the correct answer.