Question

A conventional mortgage loan is one that is not insured or guaranteed by an agency of the U.S. government. The lender, however, can still pursue a private mortgage insurance (PMI) policy to provide a guarantee for the fulfillment of the borrower's obligations. Typically PMI is required for all loans that have a loan to value (LTV) ratio greater than: a)40%. b)60%. c)20%. d)80%.

Answer 1

Answer: d)80%.

PMI is required for all loans that have an LTV ratio of 80%.

Step-by-step explanation:

Institutions and lenders calculate the LTV ratio and assess the risk prior to the approval of a mortgage loan. LTV ratio is calculated by dividing the loan amount by the property value. Higher LTV ratios indicate that there is higher risk for the lenders.

Thus a Private Mortgage Insurance has to be purchased to offset the risk of the lender. The loan amount being close to the appraised value of the property means that the LTV ration is high. Thus if the loan goes default the lender’s will have to face difficulty.

If foreclosure happens the lender wouldn’t be able to make enough Profit by selling out the property. This is why a PMI is demanded in such cases.