Nationwide Mortgage Licensing System (NMLS) Practice Exam

When does the requirement for private mortgage insurance generally continue if the loan-to-value ratio falls below?

1. 20%

2. 50%

3. 80%

4. 90%

The correct answer is: 80%

The requirement for private mortgage insurance (PMI) typically continues until the borrower's loan-to-value (LTV) ratio falls below 80%. This is a common industry standard used by lenders to mitigate their risk when a homebuyer makes a smaller down payment. PMI is generally required on conventional loans when the down payment is less than 20% of the property's value. As the LTV ratio decreases (meaning the borrower has increased their equity in the property), the risk to the lender diminishes. Once the LTV ratio is below 80%, the mortgage is considered to be at a lower risk, leading to the expectation that PMI can be removed. Borrowers can often request cancellation of PMI when they believe their LTV has dropped below this threshold, typically after increased equity is gained through payments or appreciation of the property value. In contrast, the other percentages mentioned, such as 20%, 50%, and 90%, do not align with standard PMI cancellation practices. Requiring PMI at those levels would signify a higher risk to the lender than what is typically accepted in the mortgage industry, especially since 80% has been established as the benchmark for when PMI is no longer necessary.