A mortgage file is paused during a lock-desk handoff because of Government Loan Programs. Which answer should apply the requirement without relying on borrower preference?
Correct Answer
C) Apply HPA cancellation only to covered PMI
Why this is correct: The Homeowners Protection Act (HPA) mandates automatic termination and borrower cancellation rights for borrower-paid Private Mortgage Insurance (PMI) on certain residential mortgages when specific loan-to-value (LTV) and timing thresholds are met. However, the HPA does not apply to all mortgage insurance. For example, it does not cover lender-paid MI, FHA MIP, or VA funding fees. The correct answer applies the rule precisely: HPA cancellation applies only to covered PMI. Why the other choices are wrong: "Ignore borrower-paid versus lender-paid MI when comparing payment and rate" is wrong because the cost structure and cancellability differ fundamentally between these types, affecting the loan's annual percentage rate (APR) and long-term cost; they cannot be ignored in a proper comparison. "Treat all mortgage-insurance premiums as cancellable at the same point" is wrong because cancellation rules vary by MI type (e.g., FHA MIP may be for the life of the loan depending on LTV and term), so treating them all the same is incorrect. "Use the purchase price as the only factor when PMI depends on LTV and program terms" is wrong because PMI premiums and requirements are based on the LTV ratio, which uses the lesser of the purchase price or appraised value, and also depend on the specific loan program's terms; the purchase price alone is insufficient. Exam tip: HPA = borrower-paid PMI on certain conventional loans. If the MI is lender-paid, FHA, VA, or USDA, different rules apply. Always identify the MI type first.
Why This Is the Correct Answer
The correct response is "Apply HPA cancellation only to covered PMI" because PMI options affect borrower cost and depend on loan type, LTV, and mortgage-insurance rules.
Why the Other Options Are Wrong
Option A: Ignore borrower-paid versus lender-paid MI when comparing payment and rate.
This choice is a tempting shortcut, but it conflicts with PMI and mortgage-insurance options because the file still needs the required documentation, timing, or rule-based review before the action is taken.
Option B: Treat all mortgage-insurance premiums as cancellable at the same point.
This choice is not the best answer because it applies the wrong file step for PMI and mortgage-insurance options; the governing rule is tested by the correct option.
Option D: Use the purchase price as the only factor when PMI depends on LTV and program terms.
This choice is a tempting shortcut, but it conflicts with PMI and mortgage-insurance options because the file still needs the required documentation, timing, or rule-based review before the action is taken.
Memory Technique
PMI options and mortgage-insurance costs: identify the rule being tested, then choose the action that documents or applies that rule before the file moves forward.
Exam Tip
For PMI and mortgage-insurance options questions, separate the required file step from plausible sales, timing, or documentation shortcuts.
Common Mistakes to Avoid
- -Choosing an internal exception instead of the governing rule
- -Treating preliminary or informal facts as a substitute for required documentation
- -Answering from a familiar but unrelated mortgage topic
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