Accounting Fundamentals Certification (AFC) Practice Test

When taking out a mortgage with less than a 20% down payment, it is typically necessary to obtain mortgage insurance. This is specifically designed to protect the lender in case the borrower defaults on the loan. Since a smaller down payment is associated with a higher risk for the lender, mortgage insurance mitigates that risk by providing a level of security.

Mortgage insurance comes in various forms, including private mortgage insurance (PMI) for conventional loans or mortgage insurance premiums (MIP) for government-backed loans like FHA loans. By requiring this insurance, lenders can offer loans to borrowers who may not have the means to make a substantial down payment, thereby expanding access to home ownership while managing their financial risk.

Unlike other types of insurance mentioned, such as home warranty insurance which covers repairs and maintenance of home appliances, title insurance that protects against defects in the title to the property, or moral hazard insurance which is not a standard type of insurance, mortgage insurance specifically applies to situations involving home loans with lower equity stakes. Therefore, it is the appropriate requirement when the down payment is less than 20%.