What is PMI and when is it required?

Private Mortgage Insurance, commonly referred to as PMI, is a type of insurance that lenders require when a borrower makes a down payment of less than 20% on a home purchase. The primary purpose of PMI is to protect the lender in case the borrower defaults on the loan. Since a smaller down payment indicates a higher risk for the lender, PMI serves as a safeguard, allowing borrowers to finance their homes with a lower initial investment.

When the down payment is less than 20%, lenders may impose PMI to mitigate the financial risk associated with lending to borrowers who have less equity in their homes. This is essential because it helps make homeownership accessible to more individuals who may not have substantial savings for a large down payment.

In contrast, options that mention credit score requirements or refer to public mortgage insurance do not accurately characterize the purpose and requirement of PMI, as it is strictly tied to the size of the down payment rather than the borrower's creditworthiness or public programs.