What best describes private mortgage insurance (PMI) and mortgage insurance premium (MIP) and when they are typically required?

• A. They protect the lender when the down payment is below a required threshold; PMI is for conventional loans, MIP for FHA.
• B. PMI is for FHA loans only.
• C. MIP is required for conventional loans.
• D. They are optional in all loan programs.

Answer: (A)

Mortgage insurance exists to protect the lender when a borrower hasn’t put down the typical 20% equity. When the down payment is below that threshold, lenders generally require some form of insurance to cover the risk of default.

Private mortgage insurance, or PMI, is the name used for conventional loan programs. It’s required when the down payment is under 20%, and it can often be canceled once you’ve reached enough equity (typically around 20% or more) and meet on-time payment requirements.

Mortgage insurance premium, or MIP, is the insurance used with FHA loans. It’s a built-in part of the FHA program and is typically required for the life of the loan or for a long period, depending on the loan terms and down payment.

In short, both protect the lender when there’s less than a 20% down payment, with PMI tied to conventional loans and MIP tied to FHA loans.