What is the purpose of private mortgage insurance (PMI)?

Private mortgage insurance (PMI) serves to protect the lender in the event that a borrower defaults on their mortgage. This insurance is typically required when the borrower is unable to make a down payment of at least 20% of the home's purchase price. By having PMI, lenders can mitigate their risk, as it provides them with a safety net that helps cover losses incurred from a foreclosure process.

This insurance assures lenders that if they need to take possession of the property due to non-payment, PMI can offset some of the financial losses they might experience. Consequently, while the borrower pays the PMI premium, its primary function is to benefit the lender, facilitating loan approval even for those who may not have substantial equity in the property at the outset.

The focus on lender protection differentiates PMI from other insurance forms or protections that may relate to borrower concerns, such as title insurance or coverage for environmental hazards. These serve entirely different roles in real estate transactions.