- Official section
- National IV: Financing
- Broker weight
- 10% of the national broker portion
- Expected scored items
- Financing accounts for about 10 of 100 items
Illinois exam glossary
Private mortgage insurance
PMI is easier once you stop treating 20 percent, 80 percent, and 78 percent as interchangeable. Less than 20 percent down often explains why coverage begins. An 80 percent balance can support a qualified written cancellation request. A scheduled 78 percent balance can trigger automatic termination. Each number has a different job.
Last updated: August 1, 2026
What does this exam area cover?
Short answer: Private mortgage insurance protects a conventional mortgage lender or investor against part of a covered default loss, even when the borrower pays the premium. For many covered principal-residence loans, the borrower can request cancellation at 80 percent of original value after satisfying written-request, payment-history, current-status, property-value, and junior-lien conditions. Automatic termination generally occurs at the scheduled 78 percent point when current. A midpoint backstop applies if PMI remains. FHA MIP and VA guaranty rules are different.
This guide follows the PSI Illinois Candidate Information Booklet effective June 24, 2026, the Homeowners Protection Act in 12 USC 4901 through 4910, CFPB cancellation guidance updated June 30, 2025, current HUD FHA policy, and current VA fee guidance, all checked through August 1, 2026. The federal HPA generally addresses borrower-paid PMI on covered single-family principal-residence mortgage transactions originated on or after July 29, 1999. High-risk loans, lender-paid insurance, older loans, investment property, second homes, current-value cancellation, modifications, and investor rules need separate review.
What is on the official outline?
- Topic
- Identify PMI
- What to know
- private mortgage insurance, conventional loan, insurer, borrower-paid premium, lender-paid premium, default, claim, covered loss, lender, investor, and servicer
- Best exam move
- PMI transfers a stated layer of lender risk to a private insurer.
- Topic
- Identify the protected party
- What to know
- mortgagee, lender, investor, insurer, borrower, equity, note liability, foreclosure, deficiency, claim, and reimbursement
- Best exam move
- The lender or investor receives protection even when the borrower pays.
- Topic
- Connect PMI with LTV
- What to know
- loan amount, purchase price, appraised value, lower basis, down payment, 80%, more than 80%, risk, coverage, and conventional financing
- Best exam move
- A conventional first mortgage above 80 percent LTV commonly requires PMI, subject to program and lender rules.
- Topic
- Price the coverage
- What to know
- premium rate, credit score, LTV, coverage percentage, occupancy, property type, loan term, fixed rate, adjustable rate, borrower profile, and insurer
- Best exam move
- No single PMI premium applies to every loan because pricing reflects multiple risk factors.
- Topic
- Compare payment structures
- What to know
- monthly borrower-paid, single premium, split premium, financed premium, lender-paid mortgage insurance, rate, closing cost, refund, disclosure, and loan pricing
- Best exam move
- Who remits the premium and how the cost appears can change without changing whom the insurance protects.
- Topic
- Define original value
- What to know
- purchase, contract price, appraisal, lower amount, consummation, refinance, appraised value, original value, current value, and cancellation calculation
- Best exam move
- Use the purchase lower-of basis or refinance appraisal for the federal original-value test.
- Topic
- Request cancellation at 80%
- What to know
- cancellation date, scheduled balance, actual balance, extra principal, written request, good payment history, current, value evidence, no subordinate lien, and servicer
- Best exam move
- Eighty percent creates a request right after all statutory conditions are satisfied; it is not automatic.
- Topic
- Apply good payment history
- What to know
- 60-day late payment, 24 months, 30-day late payment, 12 months, cancellation date, written request, current status, and HPA definition
- Best exam move
- Borrower-requested cancellation includes a statutory payment-history test beyond merely being current today.
- Topic
- Terminate automatically at 78%
- What to know
- termination date, scheduled amortization, original value, fixed rate, adjustable rate, borrower request, current payment, delinquency, later cure, and servicer duty
- Best exam move
- At the scheduled 78 percent date, no borrower request is required, but current payment status matters.
- Topic
- Apply final termination
- What to know
- midpoint, amortization period, first day of following month, current, 30-year term, 15 years, balloon, interest-only, principal forbearance, and backstop
- Best exam move
- Midpoint termination protects a current borrower when the balance has not reached the normal threshold.
- Topic
- Separate scheduled and actual balance
- What to know
- amortization schedule, extra payment, curtailment, actual principal, scheduled 80%, scheduled 78%, cancellation request, automatic termination, and accelerated payoff
- Best exam move
- Extra payments can support an earlier 80 percent request, while 78 percent automatic termination tracks the scheduled date.
- Topic
- Handle delinquency
- What to know
- current, late payment, scheduled termination date, delayed termination, cure, first day of next month, accrued premium, and servicer notice
- Best exam move
- Delinquency can delay automatic or midpoint termination until the borrower becomes current.
- Topic
- Handle loan modification
- What to know
- modified principal, term, rate, amortization, cancellation date, termination date, midpoint, recalculation, agreement, and disclosure
- Best exam move
- The HPA requires relevant PMI dates to be recalculated after an agreed loan modification.
- Topic
- Review current-value options
- What to know
- appreciation, improvements, current appraisal, broker price opinion, seasoning, investor policy, current LTV, payment history, request, and servicer standards
- Best exam move
- Current-value cancellation can be available, but it comes from applicable investor or servicer rules rather than one universal HPA formula.
- Topic
- Read required disclosures
- What to know
- initial amortization schedule, cancellation date, termination date, annual notice, borrower rights, address, telephone, lender-paid disclosure, and written notice
- Best exam move
- The HPA pairs termination rights with transaction and annual disclosures.
- Topic
- Identify high-risk treatment
- What to know
- high-risk loan, Fannie Mae, Freddie Mac, nonconforming, 77%, fixed rate, adjustable rate, midpoint, exception, and risk classification
- Best exam move
- High-risk loans can follow later statutory termination treatment; do not force the ordinary 80 and 78 percent rules onto every file.
- Topic
- Separate PMI and FHA MIP
- What to know
- private insurer, conventional, FHA insurance, upfront MIP, annual MIP, HUD term, case endorsement, cancellation, refinance, and federal program
- Best exam move
- HPA private-insurance rules do not automatically control FHA mortgage insurance.
- Topic
- Separate PMI and VA guaranty
- What to know
- private insurance, VA guaranty, funding fee, eligible borrower, no monthly PMI, entitlement, lender protection, and program rules
- Best exam move
- VA uses a federal guaranty and often a one-time funding fee rather than monthly PMI.
- Topic
- Calculate borrower impact
- What to know
- monthly payment, premium, cash to close, interest rate, lender-paid pricing, APR, tax treatment, cancellation savings, total cost, and Loan Estimate
- Best exam move
- Compare the full loan price, not only the visible monthly PMI line.
Which distinctions produce the most mistakes?
- Terms
- PMI vs. homeowners insurance
- Difference
- PMI protects the lender against covered borrower default loss. Homeowners insurance covers specified property and liability risks under its policy.
- Question cue
- Credit-default protection versus property-casualty coverage.
- Terms
- PMI vs. FHA mortgage insurance
- Difference
- PMI is private coverage commonly used with conventional loans. FHA MIP belongs to a federal mortgage-insurance program.
- Question cue
- Private conventional coverage versus HUD insurance.
- Terms
- PMI vs. VA funding fee
- Difference
- PMI is insurance coverage that may carry recurring borrower premiums. The VA funding fee is generally a one-time program charge supporting the federal guaranty.
- Question cue
- Private insurance premium versus VA program fee.
- Terms
- Borrower-paid vs. lender-paid MI
- Difference
- Borrower-paid premiums are charged directly to the borrower. Lender-paid coverage is purchased by the lender and commonly recovered through rate or pricing.
- Question cue
- Direct premium versus embedded loan cost.
- Terms
- Cancellation vs. automatic termination
- Difference
- Cancellation at 80 percent requires borrower action and conditions. Automatic termination at scheduled 78 percent requires no request if the borrower is current.
- Question cue
- Request at 80 versus servicer duty at 78.
- Terms
- Automatic vs. final termination
- Difference
- Automatic termination uses the scheduled 78 percent date. Final termination uses the amortization midpoint as a backstop.
- Question cue
- Balance schedule versus time schedule.
- Terms
- Original value vs. current value
- Difference
- Original value comes from the transaction's statutory purchase or refinance basis. Current value reflects a later valuation.
- Question cue
- HPA benchmark versus present market evidence.
- Terms
- Scheduled balance vs. actual balance
- Difference
- Scheduled balance follows the amortization schedule. Actual balance reflects payments and curtailments actually credited.
- Question cue
- Expected principal path versus current loan ledger.
- Terms
- PMI coverage vs. borrower liability
- Difference
- Insurance reimburses covered lender loss. It does not rewrite the borrower's repayment promise or guarantee release from all liability.
- Question cue
- Insurer protection versus note obligation.
- Terms
- 20% down vs. 80% LTV
- Difference
- On a simple purchase calculation they are complements, but one states borrower equity contribution and the other states loan leverage.
- Question cue
- Equity share versus financed share.
- Terms
- PMI removal vs. escrow cancellation
- Difference
- PMI removal ends private mortgage-insurance premiums. Escrow cancellation changes how taxes and insurance are collected and follows separate rules.
- Question cue
- Insurance coverage versus impound account.
- Terms
- Loan approval vs. PMI approval
- Difference
- The creditor approves the mortgage. A mortgage insurer separately accepts coverage under its guidelines when insurance is required.
- Question cue
- Credit decision versus insurance risk acceptance.
The P-M-I removal check
- Pin down the coverage: identify conventional PMI, FHA MIP, VA guaranty, lender-paid MI, or another structure before applying a rule.
- Measure the correct value: use statutory original value for the federal 80 and 78 percent paths, not an unsupported current estimate.
- Identify the route: borrower-requested cancellation, automatic scheduled termination, midpoint final termination, or an additional current-value policy.
- Review every condition: written request, actual or scheduled balance, current status, good payment history, value evidence, subordinate liens, risk class, and servicer instructions.
- Route
- Borrower cancellation
- Trigger
- 80% of original value
- Key condition
- Written request plus statutory conditions
- Route
- Early request after extra payments
- Trigger
- Actual balance reaches 80%
- Key condition
- Written request plus statutory conditions
- Route
- Automatic termination
- Trigger
- Scheduled balance reaches 78%
- Key condition
- Borrower current
- Route
- Final termination
- Trigger
- Month after amortization midpoint
- Key condition
- Borrower current
- Route
- Current-value option
- Trigger
- Investor or servicer standard
- Key condition
- Valuation, seasoning, LTV, and policy conditions
How do the rules work in scenarios?
Find original value
Scenario: A principal residence sells for $400,000 and appraises for $410,000 at consummation.
- For a purchase, original value generally uses the lower of price and appraisal.
- The lower amount is $400,000.
- Eighty percent is $320,000, and 78 percent is $312,000.
Answer: Use $400,000 as original value; the 80 percent and 78 percent thresholds are $320,000 and $312,000.
Cancellation is not automatic at 80%
Scenario: A covered loan's actual principal balance reaches 80 percent of original value after extra payments. The borrower is current and has good payment history.
- The borrower can make the cancellation request early because extra payments reached the threshold.
- The request must be written.
- Value evidence and no-subordinate-lien certification may still be required.
Answer: Request cancellation in writing and satisfy the remaining HPA conditions.
Automatic termination at 78%
Scenario: The amortization schedule reaches 78 percent of original value, the loan is covered, and the borrower is current.
- The scheduled termination date has arrived.
- A new appraisal is not the ordinary federal trigger for this route.
- The borrower does not need to send an 80 percent cancellation request.
Answer: The servicer generally must terminate borrower-paid PMI automatically.
Delinquent at the 78% date
Scenario: The scheduled balance reaches 78 percent, but the borrower is not current on that date.
- Current status is required for automatic termination at the scheduled date.
- The delinquency delays termination rather than erasing the right forever.
- Termination follows after the borrower becomes current under the statute's timing rule.
Answer: PMI termination is delayed until the borrower brings the loan current.
Midpoint backstop
Scenario: A current borrower has a 30-year slow-amortizing mortgage, and PMI remains when the original amortization period reaches 15 years.
- Fifteen years is the midpoint of an original 30-year amortization period.
- The balance need not have reached 78 percent for this backstop.
- Final termination generally occurs on the first day of the following month.
Answer: The midpoint final-termination rule generally ends PMI after year 15.
Appreciation is a different path
Scenario: A borrower owes 84 percent of original value but believes appreciation has reduced current LTV to 72 percent.
- The ordinary HPA 80 and 78 percent tests use original value and principal thresholds.
- An investor or servicer may offer current-value cancellation under separate rules.
- The borrower may need seasoning, acceptable payment history, and an approved valuation.
Answer: Ask the servicer for its current-value cancellation policy rather than assuming federal automatic termination.
Calculate monthly PMI
Scenario: An exam question states a $300,000 insured balance and an annual PMI rate of 0.60 percent, paid monthly.
- $300,000 times 0.006 equals $1,800 per year.
- $1,800 divided by 12 equals $150 per month.
- The stated premium adds to the housing expense used in applicable underwriting calculations.
Answer: Monthly PMI is $150.
What are the common exam traps?
- Trap
- Saying PMI protects the borrower
- Correction
- It protects the lender or investor against part of a covered default loss.
- Trap
- Saying PMI makes missed payments
- Correction
- The borrower remains responsible for the note and can face foreclosure after default.
- Trap
- Calling PMI homeowners insurance
- Correction
- PMI covers mortgage credit risk, while homeowners insurance covers specified property and liability risks.
- Trap
- Calling FHA MIP private mortgage insurance
- Correction
- FHA coverage is federal mortgage insurance governed by HUD rules.
- Trap
- Saying every loan over 80% LTV must have PMI
- Correction
- PMI is common in higher-LTV conventional lending, but program and structure determine the requirement.
- Trap
- Saying PMI ends automatically at 80%
- Correction
- Eighty percent is generally a borrower-requested cancellation point with conditions.
- Trap
- Requiring a written request at scheduled 78%
- Correction
- Automatic termination generally requires no borrower request when the covered loan is current.
- Trap
- Using a new appraisal for the ordinary 78% test
- Correction
- That route uses scheduled principal balance against original value.
- Trap
- Ignoring current payment status
- Correction
- Delinquency can delay automatic or midpoint termination until the borrower becomes current.
- Trap
- Using the higher of price or appraisal as original value
- Correction
- A purchase generally uses the lower amount for HPA purposes.
- Trap
- Assuming appreciation creates automatic federal cancellation
- Correction
- Current-value cancellation depends on separate investor or servicer standards.
- Trap
- Ignoring subordinate liens at the 80% request
- Correction
- The servicer can require certification that the equity is not encumbered by a subordinate lien.
- Trap
- Ignoring the midpoint rule
- Correction
- It is the statutory backstop when ordinary balance-based termination has not occurred.
- Trap
- Applying ordinary borrower-paid rules to lender-paid MI
- Correction
- Lender-paid insurance has different disclosure and cost behavior and is not simply canceled from a monthly borrower line.
- Trap
- Comparing loans only by visible PMI
- Correction
- Compare rate, APR, fees, cash to close, payment, cancellation path, and total cost.
Can you answer these original practice questions?
These questions are original study items aligned to the published outline. They are not copied, recalled, or predicted PSI questions.
1. Whom does private mortgage insurance primarily protect?
- The lender or investor
- The borrower
- The appraiser
- The county assessor
Show answer and explanation
Answer: The lender or investor
Borrower payment of the premium does not change the protected party.
2. PMI is most commonly associated with which loan type?
- Conventional mortgage
- VA guaranty
- Cash purchase
- Land contract without financing
Show answer and explanation
Answer: Conventional mortgage
FHA MIP and VA guaranty are separate federal program structures.
3. What generally occurs at 80 percent of original value on a covered loan?
- The borrower may request cancellation in writing if all conditions are met
- PMI always terminates without any condition
- The mortgage is forgiven
- The deed is reconveyed
Show answer and explanation
Answer: The borrower may request cancellation in writing if all conditions are met
Good payment history, current status, value evidence, and junior-lien certification can matter.
4. What generally occurs at the scheduled 78 percent point if the borrower is current?
- Automatic PMI termination
- A mandatory refinance
- A new appraisal in every case
- An FHA funding-fee refund
Show answer and explanation
Answer: Automatic PMI termination
The servicer's duty does not depend on a written borrower request for this route.
5. What value is generally original value for a purchase?
- The lower of contract price or appraisal at consummation
- The higher of contract price or appraisal
- Any online estimate
- The future resale price
Show answer and explanation
Answer: The lower of contract price or appraisal at consummation
A refinance generally uses the appraisal relied on for that refinancing.
6. What happens if a borrower is delinquent on the scheduled 78 percent date?
- Termination is delayed until the borrower becomes current
- PMI can never end
- The balance is forgiven
- The lender must ignore the delinquency
Show answer and explanation
Answer: Termination is delayed until the borrower becomes current
Current status is a condition of automatic termination at that date.
7. What is final PMI termination based on?
- The midpoint of the amortization period
- The property's listing date
- The tax assessment appeal
- The borrower's age
Show answer and explanation
Answer: The midpoint of the amortization period
It operates as a backstop when the borrower is current and PMI has not otherwise ended.
8. Does appreciation automatically trigger federal PMI termination?
- No, additional current-value paths depend on investor or servicer rules
- Yes, at any amount
- Yes, without valuation
- Only the seller decides
Show answer and explanation
Answer: No, additional current-value paths depend on investor or servicer rules
The ordinary statutory thresholds use original value.
9. A $240,000 balance has an annual PMI rate of 0.50 percent. What is monthly PMI?
- $50
- $100
- $120
- $1,200
Show answer and explanation
Answer: $100
$240,000 times 0.005 equals $1,200 annually; divide by 12.
10. Does PMI cancellation cancel the mortgage debt?
- No
- Yes
- Only in Illinois
- Only at 80 percent
Show answer and explanation
Answer: No
It ends an insurance requirement, not the borrower's note or mortgage obligation.
How should you study this area?
- Session
- Session 1
- Focus
- Identify the protection
- Proof you are ready
- Classify 30 PMI, homeowners insurance, title insurance, FHA MIP, VA guaranty, and lender-paid MI scenarios.
- Session
- Session 2
- Focus
- Master the three exits
- Proof you are ready
- Explain and apply 80 percent cancellation, scheduled 78 percent automatic termination, and midpoint final termination in 30 prompts.
- Session
- Session 3
- Focus
- Calculate original value
- Proof you are ready
- Solve 25 purchase, refinance, scheduled-balance, actual-balance, extra-payment, and appreciation scenarios.
- Session
- Session 4
- Focus
- Check every condition
- Proof you are ready
- Audit 25 written-request, payment-history, current-status, appraisal, junior-lien, delinquency, and modification facts.
- Session
- Session 5
- Focus
- Compare program insurance
- Proof you are ready
- Build a one-page comparison of conventional PMI, FHA upfront and annual MIP, VA guaranty and funding fee, and homeowners insurance.
- Session
- Session 6
- Focus
- Run P-M-I
- Proof you are ready
- Audit two complete Illinois purchase files, calculate premium examples, score at least 90 percent, and explain every missed distractor.
Do not count recognition as mastery. Close the notes and explain the rule, apply it to a new fact pattern, and identify why each distractor fails.
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Questions students ask about Private Mortgage Insurance: Illinois Real Estate Exam Guide
What is private mortgage insurance?
Private mortgage insurance, or PMI, is insurance a private mortgage lender or investor may require when a conventional loan presents higher loan-to-value risk. It protects the lender or investor against part of a covered loss if the borrower defaults. Even when the borrower pays the premium, PMI does not insure the borrower's equity, make missed payments, or prevent foreclosure.
Who does PMI protect?
PMI protects the mortgagee or investor, not the borrower. It can make a higher-LTV conventional mortgage acceptable because a private insurer assumes a stated layer of lender loss. The borrower remains obligated on the note and mortgage. A successful insurer claim does not create free housing or necessarily eliminate the borrower's liability under applicable law and documents.
When is PMI usually required?
PMI is commonly required on a conventional first mortgage when the borrower finances more than 80 percent of the applicable property value, often described as making less than 20 percent down. That is a useful exam rule, not a universal legal command. Coverage depends on the lender, investor, loan structure, property, risk, and mortgage-insurance requirements.
How is PMI paid?
Borrower-paid PMI is often charged monthly with the mortgage payment, but mortgage insurance can also involve a single premium, split premium, or lender-paid structure. With lender-paid mortgage insurance, the lender pays the insurer and usually recovers the cost through the loan's rate or pricing. Lender-paid coverage follows different termination and disclosure treatment from ordinary borrower-paid monthly PMI.
When can a borrower request PMI cancellation?
For many covered mortgages, the borrower may request cancellation in writing when the principal balance is scheduled to reach 80 percent of the home's original value, or earlier after extra principal payments actually reduce it to that level. The borrower must be current, have good payment history, satisfy permitted value evidence, and certify that no subordinate lien encumbers the equity.
When must PMI terminate automatically?
For many covered mortgages, borrower-paid PMI must automatically terminate on the date the principal balance is scheduled to reach 78 percent of original value if the borrower is current. The test is the scheduled balance, not a new appraisal or the balance reached early through extra payments. If the borrower is delinquent then, termination occurs after the borrower becomes current.
What is PMI final termination at the midpoint?
If PMI has not otherwise ended, the Homeowners Protection Act generally prohibits it beyond the first day of the month after the midpoint of the loan's amortization period, provided the borrower is current. For an originally scheduled 30-year amortization, the midpoint follows 15 years. This backstop matters most for interest-only, principal-forbearance, balloon, or slow-amortizing loans.
What does original value mean for PMI cancellation?
For a purchase, original value generally means the lower of the contract sales price or appraised value at consummation. For a refinance, it generally means the appraised value relied on at refinancing. The federal scheduled 80 and 78 percent rules use original value, not an automatically updated market estimate from a listing site.
Can appreciation remove PMI early?
Possibly under the servicer's or investor's current-value policy, but the federal Homeowners Protection Act does not create one universal appreciation-based cancellation formula. Fannie Mae, Freddie Mac, lenders, and servicers can offer additional cancellation paths subject to seasoning, payment history, valuation, improvement, and current LTV requirements. The borrower should request the servicer's written standards.
Is PMI the same as FHA mortgage insurance?
No. PMI is private coverage most associated with conventional loans. FHA mortgage insurance is a federal program with an upfront mortgage insurance premium and, for most forward loans, an annual premium paid monthly under HUD rules. VA-backed loans use a federal guaranty and often a funding fee rather than monthly PMI. Cancellation rules must be matched to the actual program.
Are these official PSI questions or mortgage advice?
No. The questions are original. Primary sources were checked through August 1, 2026, including the current PSI Illinois outline, the federal Homeowners Protection Act, CFPB guidance updated June 30, 2025, HUD's November 26, 2025 FHA handbook, and current VA guidance. This is exam education, not servicing, insurance, lending, tax, or legal advice.
Primary sources
- PSI Illinois Candidate Information Booklet effective June 24, 2026
- U.S. House Office of the Law Revision Counsel, current 12 USC 4901 Homeowners Protection Act definitions
- U.S. House Office of the Law Revision Counsel, current 12 USC 4902 PMI cancellation and termination law
- U.S. House Office of the Law Revision Counsel, current 12 USC 4903 PMI disclosure requirements
- Consumer Financial Protection Bureau, PMI removal guide updated June 30, 2025
- Consumer Financial Protection Bureau, Homeowners Protection Act cancellation and termination compliance bulletin
- U.S. Department of Housing and Urban Development, FHA Single Family Housing Policy Handbook 4000.1 dated November 26, 2025
- U.S. Department of Veterans Affairs, current funding-fee and closing-cost guidance updated January 2026
The current official outline controls the tested scope. Statutes, regulations, and official agency materials control when a general study rule and a jurisdiction-specific rule differ.
Editorial status
Checked against primary sources
The Pass Illinois editorial team last checked this guide on August 1, 2026. Every practice question is an original study item, and the source links above let you verify the rules that support the lesson.