Illinois Real Estate Exam Practice Question
What type of conventional loan should a buyer choose to avoid paying PMI?
Correct Answer: A
Rationale: To avoid paying Private Mortgage Insurance (PMI), a buyer should select a loan with a Loan-to-Value (LTV) ratio of 80% or lower. This option ensures that the borrower has at least 20% equity in the home, which eliminates the need for PMI, a cost that protects lenders in case of default.
Option B, a budget loan with a 10% down payment, results in a 90% LTV, which requires PMI. Option C, a package mortgage with an LTV of 86%, also necessitates PMI due to its high LTV. Lastly, option D describes an Adjustable Rate Mortgage (ARM) starting at a 95% LTV, which clearly requires PMI as it exceeds the 80% threshold.
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