If a borrower has $37,500 available for a down payment and wants to avoid mortgage insurance, what is the maximum price of a house they can afford?

To determine the maximum house price a borrower can afford while putting down $37,500 and avoiding mortgage insurance, it is important to consider the typical minimum down payment required for conventional loans, which is usually 20%. This helps the borrower avoid private mortgage insurance (PMI).

If the borrower wants to avoid PMI, they would need to have a down payment that is at least 20% of the purchase price. The calculation for determining the maximum purchase price can be set up as follows:

Let "P" be the purchase price of the house. To find the maximum price, you set up the equation:

Down payment = 20% of Purchase Price

$37,500 = 0.20 * P

To find "P," you rearrange the equation:

P = $37,500 / 0.20

P = $187,500

Thus, the maximum price of a house that the borrower can afford, while providing a down payment of $37,500 and avoiding mortgage insurance, is $187,500. This reasoning confirms that the choice reflecting the maximum house price they can afford is indeed the correct answer.