Tennessee Realtor State Practice Exam

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Prepare for the Tennessee Realtor State Exam. Use flashcards and multiple-choice questions, each with hints and explanations. Ensure your success!

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When does a lender generally require private mortgage insurance?

When the borrower has no credit history.
When the loan amount is above a certain threshold.
When the loan-to-value ratio exceeds a specific percentage.
When the property is in a rural area.

The correct answer is: When the loan-to-value ratio exceeds a specific percentage.

A lender generally requires private mortgage insurance (PMI) when the loan-to-value (LTV) ratio exceeds a specific percentage, typically around 80%. This requirement is in place because a higher LTV ratio indicates that the borrower is financing a larger portion of the property's value, which adds risk for the lender in the event of default. PMI protects the lender by covering a portion of the losses if the borrower fails to repay the mortgage, effectively reducing the lender's risk associated with high LTV loans. This helps borrowers who may not have a large down payment to secure financing while allowing lenders to mitigate some of the risk involved with loans that have a higher likelihood of default. The other options do not accurately reflect the standard practices around PMI. For instance, having no credit history does not directly trigger PMI requirements, nor does being in a rural area or having a loan amount above a threshold directly influence PMI without considering the LTV ratio.