Tennessee Real Estate License Exam Practice Question
What would most lenders require if the buyer is putting less than 20% down?
Correct Answer: D
Rationale: When a buyer puts down less than 20%, lenders typically require private mortgage insurance (PMI) to protect against potential default. PMI mitigates the lender's risk, making it a standard requirement in such scenarios.
Option A, one year's worth of reserves in a certificate of deposit, is not a common requirement for lower down payments. While reserves may be considered, they do not specifically address the risk associated with low equity.
Option B, a certificate of reasonable value, pertains to VA loans and is not relevant to conventional financing.
Option C, a FICO score of at least 745, exceeds typical requirements; most lenders accept lower scores, especially when PMI is in place. Thus, PMI is the essential requirement for buyers making a smaller down payment.
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