Which of the following statements describes an advantage of a purchase money second mortgage?

Which of the following statements describes an advantage of a purchase money second mortgage?
A . The borrower pays two mortgage payments.
B . The borrower avoids paying into the escrow account.
C . The borrower avoids paying private mortgage insurance
D . The borrower’s loan closes faster than a regular mortgage.

View Answer

Answer: C

Explanation:

A purchase money second mortgage allows a borrower to avoid paying private mortgage insurance (PMI) by using a second loan to cover part of the down payment. This structure, often referred to as a "piggyback loan", is commonly used when a borrower does not have a 20% down payment but wants to avoid PMI, which is typically required for loans with less than 20% down.

The borrower makes payments on both the primary mortgage and the second mortgage, but by keeping the loan-to-value (LTV) on the first mortgage below 80%, they can avoid PMI.

References:

Fannie Mae Selling Guide on purchase money mortgages

Freddie Mac Guidelines on private mortgage insurance