A processor handoff raises a PMI and Mortgage Insurance question for a licensing coordinator. What answer should guide the file?
Correct Answer
B) Explain borrower-paid and lender-paid mortgage insurance tradeoffs
Why this is correct: Private Mortgage Insurance (PMI) is often required for conventional loans with a loan-to-value (LTV) ratio above 80%. Borrowers generally have options, primarily borrower-paid MI (monthly premium) and lender-paid MI (a higher interest rate where the lender pays the premium). Each has different cost structures and long-term implications. The correct answer, "Explain borrower-paid and lender-paid mortgage insurance tradeoffs," reflects the MLO's duty to properly disclose these options so the borrower can make an informed decision based on their financial situation and plans. Why the other choices are wrong: "Treat all mortgage-insurance premiums as cancellable at the same point" is wrong because cancellation rules differ between conventional PMI (which has automatic and request-based termination) and FHA MIP (which may be for the life of the loan). "Use the purchase price as the only factor when PMI depends on LTV and program terms" is wrong because PMI requirements and costs are primarily based on the LTV ratio (loan amount divided by property value) and the specific loan program's guidelines, not just the price. "Assume lender-paid MI has no cost because it is not shown as a separate monthly premium" is wrong because lender-paid MI has a real cost baked into a higher interest rate, which increases the borrower's total interest paid over the loan life. Exam tip: PMI is not one-size-fits-all. Key factors are LTV, loan type, and the tradeoff between monthly cost (borrower-paid) and permanent rate increase (lender-paid).
Why This Is the Correct Answer
The correct response is "Explain borrower-paid and lender-paid mortgage insurance tradeoffs" because PMI options affect borrower cost and depend on loan type, LTV, and mortgage-insurance rules.
Why the Other Options Are Wrong
Option A: 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 C: 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.
Option D: Assume lender-paid MI has no cost because it is not shown as a separate monthly premium.
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.
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
More Origination Questions
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During a post-application update, a quality-control reviewer encounters a Credit Analysis and Evaluation issue. Which response should avoid a shortcut that would misapply the rule?
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Before closing, the team discovers that a borrower asks which upfront charge can be collected before intent to proceed. What is the safest compliant answer?
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Before releasing the final construction draw, which combination most directly supports project completion and clear collateral?
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A branch manager asks about a loan file because a processor wants to omit known monthly obligations from underwriting. What should happen?
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