What does it mean if a mortgage is classified as "high-ratio"?

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A mortgage is classified as "high-ratio" when the down payment is less than 20% of the purchase price of the property. This classification is significant in the mortgage industry because it indicates that the borrower is borrowing a larger percentage of the property's value, which typically requires the borrower to purchase mortgage default insurance. This insurance protects the lender in case the borrower defaults on the loan.

When a borrower makes a down payment of less than 20%, they are seen as higher risk from the lender's perspective. Therefore, the classification is crucial in determining loan terms and conditions, as well as the type of insurance that may be required.

The other options do not accurately reflect the definition of a high-ratio mortgage. Having bad credit relates to the creditworthiness of the borrower rather than the down payment amount. The loan amount exceeding the property value is referred to as being underwater or negative equity, not specifically high-ratio. The term length of a mortgage does not dictate whether it is classified as high-ratio; rather, this classification focuses strictly on the proportion of the down payment relative to the total value of the mortgage.

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