How can a borrower avoid Private Mortgage Insurance (PMI)?

• A. By making a down payment of 20% or more on a conventional loan.
• B. By obtaining a government-backed mortgage.
• C. By securing a loan with a shorter repayment term.
• D. By paying off debts before applying for a mortgage.

Answer: (A)

A borrower can avoid Private Mortgage Insurance (PMI) by making a down payment of 20% or more on a conventional loan. PMI is typically required by lenders when a borrower makes a down payment of less than 20% of the home's purchase price. This insurance protects the lender in case the borrower defaults on the loan. By contributing a down payment of 20% or more, borrowers demonstrate a stronger financial commitment and lower the lender's risk, thus eliminating the need for PMI.

The other options do not directly address avoiding PMI. Government-backed mortgages, such as FHA loans, may require mortgage insurance regardless of the down payment. Securing a loan with a shorter repayment term does not inherently affect PMI requirements unless it is coupled with a sufficient down payment. Paying off debts before applying for a mortgage can improve a borrower’s credit profile, potentially leading to better loan terms, but it does not directly impact PMI requirements. Therefore, making a substantial down payment is the most effective strategy for avoiding PMI.