Housing Counselor Certification (HUD) Practice Exam

What is a key difference between PMI and MIP?

1. PMI is only for loans with no down payment, while MIP applies to all loans

2. PMI can be removed once the equity reaches 20%, while MIP does not have a removal option

3. Conventional loans may require PMI, removed at 78% LTV, while FHA loans require MIP for the life of the loan

4. MIP is designed for borrowers with high credit scores, while PMI is for those with lower credit scores

The correct answer is: Conventional loans may require PMI, removed at 78% LTV, while FHA loans require MIP for the life of the loan

The distinction between PMI (Private Mortgage Insurance) and MIP (Mortgage Insurance Premium) is critical for understanding how they apply to different types of mortgage loans. The selected answer highlights that conventional loans, typically associated with PMI, may not require this insurance once the borrower's equity reaches a certain level, specifically 20%. In contrast, MIP, which is applicable to FHA loans, remains in effect for the duration of the loan unless certain refinancing conditions are met. This reflects the understanding that PMI is often tied to conventional loans aimed at protecting lenders against defaults when buyers make smaller down payments. If the borrower's payment history shows responsible management and their equity rises, they can request the removal of PMI once their equity is at least 20%. MIP, on the other hand, is required for federal-backed FHA loans regardless of the amount of the down payment, and unlike PMI, it does not automatically get canceled after reaching a specific equity threshold. This difference underscores the ongoing financial commitment borrowers make when they have a FHA loan, as they carry MIP for the entirety of the mortgage term or until they refinance. This understanding of PMI and MIP is essential for housing counselors to effectively advise clients on their loan options and the long-term financial implications of choosing