CHCP Insurance & Liability Considerations 3 — Questions and Answers
Question 1: Private Mortgage Insurance (PMI) is typically required when a conventional loan has a loan-to-value ratio exceeding what percentage?
- 70%
- 75%
- 80% (Correct answer)
- 90%
Correct answer: 80%
PMI is generally required on conventional loans when the down payment is less than 20%, meaning the LTV exceeds 80%.
Question 2: Under the Homeowners Protection Act, when must a lender automatically cancel PMI on a residential mortgage?
- When the loan balance reaches 90% LTV
- When the loan balance reaches 80% LTV based on original value
- When the loan balance reaches 78% LTV based on original value (Correct answer)
- After 5 years of on-time payments regardless of LTV
Correct answer: When the loan balance reaches 78% LTV based on original value
The Homeowners Protection Act requires automatic PMI cancellation when the loan balance reaches 78% of the original purchase price through scheduled payments.
Question 3: What is a 'mechanics lien' and how can it affect a real estate closing?
- A lien placed by a mechanic's shop on a vehicle stored on the property
- A lien filed by contractors or suppliers for unpaid labor or materials on the property (Correct answer)
- A government tax lien for unpaid property taxes
- A lien placed by the HOA for unpaid dues
Correct answer: A lien filed by contractors or suppliers for unpaid labor or materials on the property
A mechanics lien can cloud the title and must be resolved before closing since it represents an unpaid obligation for work done on the property.
Question 4: Which of the following losses is typically EXCLUDED from a standard homeowner's insurance policy?
- Fire damage to the structure
- Theft of personal property
- Flood damage (Correct answer)
- Lightning damage
Correct answer: Flood damage
Flood damage is specifically excluded from standard homeowner's policies and requires a separate flood insurance policy, typically through the NFIP.
Question 5: What is the purpose of a 'gap endorsement' in title insurance?
- To cover the period between the title search and the recording of the deed (Correct answer)
- To cover damage caused by gaps in the foundation
- To insure against survey discrepancies
- To cover losses from undisclosed easements
Correct answer: To cover the period between the title search and the recording of the deed
A gap endorsement protects against title defects that arise between the date of the title search and the actual recording of the new deed and mortgage.
Question 6: A closing professional holds escrow funds that are later discovered to have been misappropriated by an employee. Which type of insurance covers this loss?
- E&O insurance
- General liability insurance
- Fidelity bond / crime coverage (Correct answer)
- Title insurance
Correct answer: Fidelity bond / crime coverage
A fidelity bond or crime insurance policy covers losses caused by employee theft or dishonesty, including misappropriation of escrow funds.
Question 7: Which statement about the National Flood Insurance Program (NFIP) is correct?
- It is administered by the Federal Reserve
- It provides coverage up to $500,000 for residential structures
- It is administered by FEMA and provides up to $250,000 for residential building coverage (Correct answer)
- Private insurance companies are prohibited from offering flood coverage
Correct answer: It is administered by FEMA and provides up to $250,000 for residential building coverage
FEMA administers the NFIP, which provides up to $250,000 of building coverage and $100,000 of contents coverage for residential properties.
CHCP Insurance & Liability Considerations 3
Private Mortgage Insurance (PMI) is typically required when a conventional loan has a loan-to-value ratio exceeding what percentage?