CMPS CMPS Mortgage Insurance and Protection Products Questions and Answers 1 — Questions and Answers
Question 1: What is Private Mortgage Insurance (PMI) and when is it typically required on a conventional loan?
- Insurance protecting the borrower from job loss; required on all conventional loans
- Lender-protecting insurance required when the borrower's LTV exceeds 80% (down payment less than 20%) (Correct answer)
- Title insurance required at closing on all purchase loans
- Homeowner's insurance required by all lenders
Correct answer: Lender-protecting insurance required when the borrower's LTV exceeds 80% (down payment less than 20%)
PMI is insurance that protects the lender against borrower default when the loan-to-value ratio exceeds 80%, typically triggered by a down payment of less than 20%.
Question 2: Under the Homeowners Protection Act (HPA), at what LTV threshold must a lender automatically cancel PMI on a conventional loan?
- 85% LTV
- 80% LTV
- 78% LTV based on original value and original amortization schedule (Correct answer)
- 75% LTV
Correct answer: 78% LTV based on original value and original amortization schedule
The HPA requires automatic PMI cancellation when the loan balance reaches 78% of the original property value based on the scheduled amortization, provided the borrower is current on payments.
Question 3: What is 'lender-paid PMI' (LPMI) and what is its main trade-off compared to borrower-paid PMI?
- The lender pays PMI premiums and waives the mortgage payment for one year
- The lender pays the PMI premium but charges a higher interest rate, which cannot be cancelled like BPMI (Correct answer)
- The lender absorbs the insurance cost on all government loans
- LPMI eliminates mortgage insurance entirely with no cost to the borrower
Correct answer: The lender pays the PMI premium but charges a higher interest rate, which cannot be cancelled like BPMI
With LPMI, the lender covers the PMI premium in exchange for a slightly higher interest rate, and since there is no separate PMI policy, cancellation is not possible — the rate remains elevated for the life of the loan.
Question 4: FHA loans require a Mortgage Insurance Premium (MIP). What is the current upfront MIP percentage for most FHA purchase loans?
- 0.55%
- 1.75% (Correct answer)
- 2.50%
- 0.85%
Correct answer: 1.75%
FHA charges an upfront MIP of 1.75% of the base loan amount, which can be paid at closing or rolled into the loan balance.
Question 5: For FHA loans originated after June 3, 2013, with a down payment of less than 10%, when does the annual MIP cancel?
- When the LTV reaches 80%
- After 11 years of on-time payments
- MIP does not cancel — it remains for the life of the loan (Correct answer)
- When the loan balance drops below $100,000
Correct answer: MIP does not cancel — it remains for the life of the loan
For FHA loans originated after June 3, 2013, with less than 10% down, the annual MIP is permanent and cannot be cancelled regardless of equity.
Question 6: A CMPS advisor is comparing the total cost of BPMI versus an 80-10-10 piggyback loan structure. The primary goal of the piggyback is to:
- Qualify for a lower FHA rate
- Avoid PMI by keeping the first mortgage at 80% LTV using a second mortgage for the remaining 10% (Correct answer)
- Meet the jumbo loan threshold
- Satisfy lender escrow requirements
Correct answer: Avoid PMI by keeping the first mortgage at 80% LTV using a second mortgage for the remaining 10%
An 80-10-10 piggyback uses a first mortgage at 80% LTV, a second mortgage for 10%, and a 10% down payment — keeping the primary loan below 80% LTV so PMI is not required.
