Mortgage Insurance and Closing Details

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Questions and Answers

Under what circumstances is Private Mortgage Insurance (PMI) typically required?

When borrowers refinance with more than 20% equity

When borrowers have a credit score below 600

When borrowers choose a government loan program

When borrowers make a down payment of less than 20% (correct)

What is the primary benefit of PMI for lenders?

It reduces lender risk enabling higher LTV ratio loans (correct)

It allows for lower interest rates on mortgages

It guarantees full repayment of the loan

It provides financial training for borrowers

When can PMI be terminated during the life of the loan?

After 5 years of regular payments

At a specified point determined by the lender's policy (correct)

When the loan-to-value ratio exceeds 80%

When the borrower reaches a 50% equity stake

How is PMI typically paid by borrowers?

A one-time payment at closing or monthly installments Signup and view all the answers

What does Lender Paid Mortgage Insurance (LPMI) involve?

The lender pays PMI up-front in exchange for higher interest rates Signup and view all the answers

Which statement is true regarding the coverage of PMI?

PMI covers only the upper portion exceeding 80% LTV Signup and view all the answers

What information must be submitted to obtain government mortgage insurance?

Loan documents confirming compliance with agency standards Signup and view all the answers

Which agency typically requires PMI for loans with less than 20% equity?

Fannie Mae and Freddie Mac Signup and view all the answers

What must borrowers provide at closing in relation to homeowners insurance?

Evidence of a paid policy Signup and view all the answers

Which of the following loan programs usually require homeowners insurance to be paid through escrow?

FHA, VA, USDA, Conventional with higher than 80% LTV Signup and view all the answers

What type of insurance is specifically required when a property is in a high-risk flood zone?

Flood insurance Signup and view all the answers

What is the maximum coverage for building coverage under the FEMA program for a residential structure?

$250,000 Signup and view all the answers

Who is responsible for obtaining the Flood Certification during processing?

Private companies Signup and view all the answers

What information is NOT typically included in a Preliminary Title Report?

Compliance with building codes Signup and view all the answers

What is the role of the National Flood Insurance Program (NFIP)?

To offer flood insurance coverage across the country Signup and view all the answers

Why is the Preliminary Title Report crucial for lenders?

It reveals any liens or encumbrances that must be cleared Signup and view all the answers

Which type of insurance limits are determined by private companies?

Flood insurance limits Signup and view all the answers

What responsibility does a borrower have regarding flood insurance at closing?

To provide a paid receipt for the first-year premium Signup and view all the answers

Study Notes

Closing Preparations

PMI (Private Mortgage Insurance): Required for conventional loans with less than 20% down payment or equity. Covers lender losses if borrower defaults. Reduces lender risk, allowing higher Loan-to-Value (LTV) ratios. PMI is temporary and terminates during loan life unlike FHA loans. Fannie Mae and Freddie Mac require PMI on loans under 80% LTV. Coverage is limited to the portion above 80% LTV. Cost depends on credit score, loan type, term, and coverage amount. Payment can be monthly or upfront at closing. Lender Paid Mortgage Insurance allows higher interest rates. Lender underwriting authority for PMI may be delegated or submitted to the PMI company.
Homeowners Insurance: Required for all loans . Covers damage to house, other structures, contents, and liabilities. Borrower provides evidence of paid policy at closing. Varying requirements according to the loan program. Condo fees often include structural insurance, additional interior/contents insurance might be needed. Payment can be by the homeowner or through escrow. Most loan types require escrow payment. Liability limits often match estimated replacement cost. Risk considerations like high winds can require add-ons to coverage.
Flood Insurance: Required when property is in a high-risk flood zone (1% or more annual flood risk), determined by FEMA (Federal Emergency Management Agency) surveys. High-risk zones are typically designated "A" or "V" on flood maps. Flood certifications obtained during processing. Borrowers pay private companies for certifications; the National Flood Insurance Program (NFIP) is offered by the federal government. Private flood insurance is also available, premiums based on flood zone, property age, elevation, and number of floors. Maximum coverage for residential structures (1-4 families) is $250,000 for building and $100,000 for contents.
Title Insurance: Ensures ownership rights to the secured property. Required by most lenders. Requirements vary regionally but are standardized due to secondary market factors. Title insurance companies notified of lender requirements as part of closing instructions. Preliminary title reports are generated using public record searches, and provide information about property owners, easements, liens, and encumbrances; the report may identify issues that must be cleared before sale. Crucial for lender approval. Preliminary reports usually are provided for free by title insurance company.

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Description

This quiz covers the essentials of Private Mortgage Insurance (PMI) and Homeowners Insurance as they pertain to closing preparations for loans. Understand the requirements, costs, and coverage associated with these insurances to ensure a smooth closing process. Familiarize yourself with the guidelines set by Fannie Mae and Freddie Mac.