Identify Mortgage Insurance Requirements - Nationwide Multistate Licensing System NMLS

1. If a conventional loan reaches $78\%$ LTV on schedule and the borrower is current, what must happen to PMI?

   PMI must automatically terminate. HPA requires lenders to end PMI automatically at this point to prevent overcharging once risk decreases.

2. What is the standard borrower-requested PMI cancellation point under the HPA for a conventional loan?

   When LTV reaches $80\%$ (at borrower request). The Homeowners Protection Act allows borrowers to request PMI removal once sufficient equity is built, reducing unnecessary insurance costs.

3. Identify the key condition that must be met for PMI cancellation at $80\%$ LTV under the HPA.

   Borrower must be current and request cancellation. HPA ensures PMI cancellation only for responsible borrowers who actively seek it after reaching the equity threshold.

4. Which agency provides the insurance coverage funded by FHA MIP payments?

   Federal Housing Administration (FHA). FHA administers the mortgage insurance program, using MIP collections to cover lender claims on defaulted loans.

5. Which statement is correct: PMI is required on VA loans with low down payments, or VA uses a funding fee instead?

   VA uses a funding fee instead of PMI. VA loans forgo traditional mortgage insurance, instead using a funding fee to support the guarantee program for veterans.

6. Which loan type typically requires PMI: conventional, FHA, VA, or USDA?

   Conventional. Conventional loans with LTV over $80\%$ require PMI to protect lenders, unlike government-backed loans with their own insurance structures.

7. Identify the standard LTV formula used to evaluate whether PMI is required.

   $\text{LTV}=\frac{\text{loan amount}}{\text{property value}}$. This ratio assesses borrower equity; PMI is triggered when it exceeds $80\%$ to mitigate lender risk.

8. Which conventional loan category is most associated with HPA PMI cancellation rules: closed-end first-lien purchase loans or open-end HELOCs?

   Closed-end first-lien residential mortgages. HPA rules target these primary home loans to standardize PMI practices, excluding variable open-end credit like HELOCs.

9. What is the upfront mortgage insurance premium called on FHA loans?

   Upfront MIP (UFMIP). UFMIP is a one-time fee collected at closing to initially fund FHA's mutual mortgage insurance program.

10. What loan-to-value (LTV) threshold typically triggers PMI on a conventional loan?

    LTV greater than $80\%$. Lenders require PMI above this threshold to offset increased default risk when borrower equity is below $20\%$.

11. If a borrower requests PMI cancellation at $82\%$ LTV, does it meet the standard $80\%$ request point?

    No, it does not meet the $80\%$ request point. Requests for cancellation are denied above $80\%$ LTV as equity is insufficient per HPA standards.

12. What does mortgage insurance premium (MIP) refer to on an FHA-insured mortgage?

    FHA mortgage insurance paid by the borrower. MIP funds the FHA's insurance program, covering lender losses on defaulted loans to encourage lending to higher-risk borrowers.

13. What is the ongoing FHA mortgage insurance premium called that is paid monthly?

    Annual MIP (paid monthly). This premium spreads ongoing insurance costs over the loan term, collected monthly to maintain FHA's fund for lender protection.

14. What is the primary underwriting reason mortgage insurance is required at higher LTV ratios?

    To offset higher default loss risk with lower borrower equity. Higher LTV means less borrower skin in the game, increasing default likelihood and potential lender losses.

15. Which FHA mortgage insurance component is typically financed into the loan amount at closing?

    UFMIP. Financing UFMIP increases the loan balance but allows borrowers to pay the upfront fee without immediate cash outlay.

16. If a conventional loan has $85\%$ LTV at origination, is PMI typically required?

    Yes, PMI is typically required. LTV above $80\%$ indicates low equity, necessitating PMI to protect the lender against potential default losses.

17. Identify the party that benefits directly from PMI or MIP coverage: borrower or lender?

    Lender. Insurance payouts compensate lenders for foreclosure shortfalls, enabling them to offer high-LTV loans safely.

18. Which loan type uses MIP rather than PMI: conventional, FHA, VA, or USDA?

    FHA. FHA loans mandate MIP to fund federal insurance, distinguishing them from conventional loans using PMI and other programs without MIP.

19. Which statement is correct: USDA charges annual and upfront guarantee fees, or USDA uses PMI?

    USDA charges guarantee fees (upfront and annual). USDA's guarantee fees fund loan guarantees for rural borrowers, differing from PMI used in conventional lending.

20. What is the standard automatic PMI termination point under the HPA for a conventional loan?

    When LTV reaches $78\%$ on the amortization schedule. HPA mandates automatic PMI termination at this equity level based on original amortization to protect borrowers from prolonged payments.

21. If a conventional loan has $75\%$ LTV at origination, is PMI typically required?

    No, PMI is typically not required. LTV below $80\%$ reflects sufficient borrower equity, eliminating the need for PMI under standard guidelines.

22. On an FHA loan, who pays MIP: the borrower, the lender, or the FHA?

    The borrower. Borrowers bear the MIP cost to access FHA's lenient underwriting, enabling homeownership with lower down payments.

23. What does private mortgage insurance (PMI) protect against in a conventional mortgage?

    Lender loss from borrower default. PMI reimburses lenders for a portion of losses if the borrower defaults on a high-LTV conventional loan, mitigating financial risk from low borrower equity.

24. What federal law primarily governs PMI disclosure and cancellation rules for many conventional loans?

    Homeowners Protection Act (HPA). This 1998 law requires lenders to disclose PMI terms and sets cancellation criteria to safeguard borrowers from indefinite insurance.

25. Which option best distinguishes PMI from MIP: conventional vs FHA, or FHA vs VA?

    PMI is conventional; MIP is FHA. PMI applies to private conventional insurance, while MIP is specific to FHA's government-backed program.

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