Tennessee Realtor State Practice Exam

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What is the percentage threshold for loan-to-value ratio above which lenders typically require private mortgage insurance for conventional loans?

  1. 75%

  2. 80%

  3. 85%

  4. 90%

The correct answer is: 80%

Lenders generally require private mortgage insurance (PMI) when the loan-to-value (LTV) ratio exceeds 80%. This requirement is established to protect the lender's investment if the borrower defaults on the mortgage. When a borrower has a higher LTV ratio, it means they are financing a larger portion of the property's value, which poses a greater risk to the lender. Requiring PMI helps mitigate that risk by providing an insurance policy that can cover losses in such cases, making it a standard practice in conventional loans. Understanding this threshold is crucial for both buyers and real estate professionals, as it influences the overall cost of borrowing and the financial decisions made when purchasing a home.

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