What background knowledge is needed for this Financing question?

Private mortgage insurance emerged in the late 1950s when Max Karl founded Mortgage Guaranty Insurance Corporation (MGIC) in 1957, creating the modern PMI industry. Before PMI existed, lenders typically required 20-30% down payments to protect themselves from default risk, which locked many middle-class Americans out of homeownership. The Homeowners Protection Act of 1998 was a landmark consumer protection law that required lenders to automatically cancel PMI when a borrower's equity reaches 22% of the original purchase price, and to honor borrower requests for cancellation at 20% equity. This law addressed widespread complaints that lenders were continuing to collect PMI premiums long after borrowers had built sufficient equity.

What is a good way to remember the answer to this Financing question?

Remember '20 is the magic number' — when you have less than 20% down, you need PMI to make up the difference in the lender's eyes. Visualize a 20% equity wall: if your down payment doesn't reach that wall, PMI is the bridge that fills the gap for the lender. You can also use the acronym PMI = 'Pays for My Insufficiency' — it's there because your down payment was insufficient to reach the 20% safety threshold. When encountering PMI questions, visualize the pizza slices - 20% is the magic number where you've got enough equity to avoid PMI.

What exam tip applies to this Financing question?

On the exam, the answer to PMI threshold questions is almost always 20% for conventional loans — if you see this as an option, it is almost certainly correct. Be careful not to confuse the PMI cancellation threshold (20% equity by request, 22% automatic) with the initial trigger threshold (less than 20% down), as questions may test either concept.

How does this Financing concept apply in real world practice?

Sarah purchases a $300,000 home with a 10% down payment of $30,000, resulting in a $270,000 loan and a 90% LTV ratio. Because her LTV exceeds 80%, her lender requires PMI at a rate of approximately 0.5-1% annually — adding roughly $112-$225 per month to her payment. Once Sarah's loan balance drops to $240,000 (80% of the $300,000 purchase price) through payments and appreciation, she can request PMI cancellation. If she doesn't request it, the lender must automatically cancel PMI when her balance reaches $264,000 (78% of original value) under the Homeowners Protection Act.

FinancingEASY

Conventional loans require private mortgage insurance (PMI) when the down payment is:

Correct Answer

C) Less than 20%

Conventional loans typically require private mortgage insurance (PMI) when the down payment is less than 20% (LTV greater than 80%). PMI can be canceled when equity reaches 20%, unlike FHA MIP which has longer duration requirements.

Answer Options

Less than 5%

Less than 10%

Less than 20%

Less than 25%

Study Infographics

Study card infographic for: Conventional loans require private mortgage insurance (PMI) when the down paymen

Download

Why This Is the Correct Answer

Why the Other Options Are Wrong

Deep Analysis of This Financing Question

Background Knowledge for Financing

Real World Application in Financing

Common Mistakes to Avoid on Financing Questions

Related Concepts

Discount Points

Discount points are upfront fees paid to a lender at closing to reduce (buy down) the interest rate on a mortgage loan. One point equals 1% of the loan amount and typically reduces the rate by approximately 0.25%.

FHA Loan

An FHA loan is a mortgage insured by the Federal Housing Administration that allows lower down payments and credit scores than conventional loans. It is designed to help first-time homebuyers and borrowers with limited resources.

Fixed-Rate Mortgage

A fixed-rate mortgage has an interest rate that remains constant for the entire term of the loan, resulting in equal monthly principal and interest payments throughout the life of the mortgage.

Was this explanation helpful?

People Also Study

Buyer Representation Agreement

8% of exam

Property Ownership

10% of exam

Land Use Controls and Regulations

8% of exam

Valuation and Market Analysis

10% of exam

How to Review Real Estate Financing Questions by Separating Loan Purpose, Cost, and Risk

A topic that feels clear in notes can still fail in practice if recall has not caught up with recognition. If you are searching for review real estate...

Real Estate Exam Practice Questions by Topic (2026): Free Sets for Contracts, Agency, Financing

Get topic-based real estate exam practice sets and a simple sequence to move from learning to timed mocks.

Real Estate Exam Topics (2026): High-Yield Areas + Common Traps (Contracts, Agency, Financing, Fair Housing)

Learn the highest-frequency real estate exam topics and the traps that cause most wrong answers—plus how to study them.

Financing Questions

Conventional loans require private mortgage insurance (PMI) when the down payment is:

Why This Is the Correct Answer

Why the Other Options Are Wrong

Deep Analysis of This Financing Question

Background Knowledge for Financing

Real World Application in Financing

Common Mistakes to Avoid on Financing Questions

Related Topics & Key Terms

Related Concepts

More Financing Questions

People Also Study

Related Articles

Practice More Questions