Finance
A borrower's loan-to-value (LTV) ratio on a purchase is 95%. This is significant because:
AThe borrower automatically qualifies for an FHA loan
BPMI will typically be required since the LTV exceeds 80%✓ Correct
CThe lender cannot make the loan under federal law
DThe borrower must pay 2 additional discount points
Explanation
When a borrower puts less than 20% down (LTV above 80%), lenders typically require private mortgage insurance (PMI) on conventional loans to protect against default risk. An LTV of 95% means a 5% down payment.
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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.
Discount PointsPrepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.
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.
Math Concepts
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