General Mortgage Knowledge · 20% of the SAFE exameasy
Correct answer: Because the borrower's LTV is 85%, which exceeds the 80% threshold requiring PMI on conventional loans
Private mortgage insurance (PMI) is required on conventional loans when the loan-to-value ratio (LTV) exceeds 80% — meaning the borrower puts down less than 20%. In this scenario: down payment = $60,000, loan amount = $340,000, LTV = $340,000 ÷ $400,000 = 85%. Since 85% exceeds 80%, PMI is required. PMI protects the lender (not the borrower) against loss if the borrower defaults. Under the Homeowners Protection Act, PMI automatically terminates at 78% LTV of original value, and borrowers can request cancellation at 80% LTV. Not all conventional loans require PMI — only those above 80% LTV. The 25% threshold is not the standard; 20% down (80% LTV) is the dividing line. Conforming loan limits relate to whether a loan can be sold to Fannie Mae/Freddie Mac, not to PMI requirements.
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