Accounting Fundamentals Certification (AFC) Practice Test

When a down payment of less than 20% is made on a mortgage, mortgage insurance is typically required. This insurance protects the lender in case the borrower defaults on the loan. Since a smaller down payment indicates a higher risk for the lender, mortgage insurance helps mitigate that risk. It essentially allows lenders to offer loans to borrowers who might not have enough savings to make a larger down payment.

Choosing mortgage insurance is essential for borrowers who wish to secure a mortgage with a lower down payment. This form of insurance can come in two main types: private mortgage insurance (PMI) for conventional loans and mortgage insurance premiums (MIP) for FHA loans. The requirement for mortgage insurance is a common practice in the mortgage industry to safeguard lenders against potential losses while allowing borrowers to enter the housing market with a more manageable upfront investment.

Home Owner's Association fees, escrow fees, and home warranty insurance do not directly relate to down payment percentages in the same way that mortgage insurance does; they serve different purposes in the overall home buying and ownership process.