General Mortgage Knowledge · 20% of the SAFE exameasy
Correct answer: The lender will typically require private mortgage insurance (PMI) until the borrower reaches 20% equity.
On conventional loans, lenders require private mortgage insurance (PMI) when the borrower's down payment is less than 20% of the purchase price — meaning the loan-to-value (LTV) ratio exceeds 80%. PMI protects the lender against default risk. Once the borrower's equity reaches 20% (LTV drops to 80%), PMI can generally be cancelled under the Homeowners Protection Act. "The borrower must pay for FHA mortgage insurance pre..." is incorrect because conventional loans absolutely can require mortgage insurance — being non-government-backed does not exempt borrowers from PMI. "The borrower is exempt from mortgage insurance becau..." is incorrect because FHA mortgage insurance premium (MIP) applies only to FHA loans, not conventional loans. "The borrower must purchase a second mortgage to avoi..." is incorrect because while an 80-10-10 piggyback structure (using a second mortgage to avoid PMI) does exist as a strategy, it is not an automatic or standard consequence — the standard outcome is simply that PMI is required.
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