Loan Officer Practice Exam

What is the minimum required amount of flood insurance for first mortgages, excluding which of the following?

1. A) The unpaid principal balance of the mortgage loan

2. B) 90% of the purchase cost of the insurable value

3. C) 100% of the replacement cost of the improvements

4. D) The maximum insurance from the NFIP

The correct answer is: B) 90% of the purchase cost of the insurable value

The minimum required amount of flood insurance for first mortgages is based on the unpaid principal balance of the mortgage loan, the maximum insurance available from the National Flood Insurance Program (NFIP), and the replacement cost of the improvements, whichever of these amounts is less. The choice indicating 90% of the purchase cost of the insurable value does not apply as it does not align with the established guidelines for determining insurance requirements. In this context, flood insurance is primarily focused on protecting the lender's interest in the property in the event of flood damage, hence it emphasizes the outstanding mortgage balance, replacement cost, or the NFIP limit. Therefore, the other options either exceed or do not accurately reflect the required parameters for flood insurance limits. The referenced option relies on a percentage of purchase cost, which does not directly correlate to the specific criteria for first mortgage insurance requirements as outlined by regulatory standards.