If a borrower has less than a 20% down payment, what would be required on a conventional loan if the loan to value is greater than 80%?

If a borrower has less than a 20% down payment, what would be required on a conventional loan if the loan to value is greater than 80%?

• A. Private mortgage insurance
• B. Homeowners insurance
• C. Flood insurance
• D. Title insurance

Answer: (A)

When a borrower makes a down payment of less than 20% on a conventional loan, the loan-to-value (LTV) ratio exceeds 80%. In this situation, lenders typically require private mortgage insurance (PMI). This insurance protects the lender in case the borrower defaults on the loan. Since the borrower has a higher LTV, which indicates a higher risk for the lender, PMI is necessary to mitigate that risk. Homeowners insurance provides coverage for the property itself and is required regardless of down payment size, but it does not protect the lender against borrower default. Flood insurance is specifically needed for properties in designated flood zones but is independent of the down payment or LTV ratio. Title insurance protects against issues related to property titles and is also unrelated to the borrower’s down payment. Therefore, private mortgage insurance is the required protection for a conventional loan with a down payment of less than 20%, addressing the lender's exposure to higher risk.

When a borrower makes a down payment of less than 20% on a conventional loan, the loan-to-value (LTV) ratio exceeds 80%. In this situation, lenders typically require private mortgage insurance (PMI). This insurance protects the lender in case the borrower defaults on the loan. Since the borrower has a higher LTV, which indicates a higher risk for the lender, PMI is necessary to mitigate that risk.

Homeowners insurance provides coverage for the property itself and is required regardless of down payment size, but it does not protect the lender against borrower default. Flood insurance is specifically needed for properties in designated flood zones but is independent of the down payment or LTV ratio. Title insurance protects against issues related to property titles and is also unrelated to the borrower’s down payment. Therefore, private mortgage insurance is the required protection for a conventional loan with a down payment of less than 20%, addressing the lender's exposure to higher risk.