What is the requirement for Private Mortgage Insurance (PMI) to be applicable?

Private Mortgage Insurance (PMI) is designed to protect lenders against the possibility of borrower default, particularly when the borrower has a smaller down payment. When a borrower puts down less than 20% of the property's value, lenders perceive a higher risk of default since the borrower has less equity in the property. Therefore, to mitigate this risk, lenders often require PMI for loans where the down payment is below this threshold.

This requirement exists because the less equity a borrower has, the more likely they could walk away from the mortgage without facing significant financial loss. PMI helps to safeguard lenders by covering a portion of the potential loss if the borrower defaults. In summary, when a borrower makes a down payment of less than 20%, PMI becomes a necessary measure for the lender, making this option correct.

Other situations, such as making a down payment of 30% or more, would typically eliminate the need for PMI altogether, while government-backed loans may have different requirements regarding insurance. Commercial property loans typically follow distinct regulations and risk assessments that differ from residential loans.