Finance
What is the purpose of Private Mortgage Insurance (PMI) on a conventional loan?
AIt insures the buyer's personal belongings inside the home after purchase
BIt protects the lender against loss if the borrower defaults when the loan-to-value ratio exceeds 80%✓ Correct
CIt is required by Pennsylvania law on all residential mortgage loans
DIt protects the buyer's down payment if the seller fails to close
Explanation
PMI protects the lender against loss if a borrower defaults on a conventional mortgage with less than 20% down payment (LTV above 80%). The borrower pays the PMI premium, typically 0.
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Key Terms to Know
Private Mortgage Insurance (PMI)
Insurance required by lenders on conventional loans with less than 20% down payment, protecting the lender — not the borrower — against default.
Loan-to-Value Ratio (LTV)The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.
AmortizationThe gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.
Debt-to-Income Ratio (DTI)A lender's measure of a borrower's monthly debt obligations relative to their gross monthly income, used to evaluate loan eligibility.
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