Ace the Arizona Real Estate Exam 2025 – Unlock Your Property Dreams!

PMI, or private mortgage insurance, is typically required on conventional loans when the borrower makes a down payment of less than 20%. The primary purpose of PMI is to protect the lender in the event of default. However, it is possible for PMI to be eliminated under specific circumstances.

The correct answer highlights that PMI will be automatically removed when the loan-to-value (LTV) ratio is reduced to 78%. This means that once the borrower has paid down enough of the loan such that the remaining balance is 78% of the home's original appraised value, the lender is required to cancel the PMI. This rule is in place to ensure borrowers are not paying for unnecessary insurance once their equity in the property has reached a satisfactory level.

The other scenarios presented do not meet the standard criteria for PMI elimination. For instance, simply after a certain number of payments or due to a borrower’s change in circumstance, such as being disabled, does not automatically trigger the cancellation of PMI, nor does the sale of the loan to Fannie Mae. The focus remains on the LTV ratio, reinforcing the importance of equity in determining the necessity for PMI.