What is one reason a lender may require private mortgage insurance (PMI)?

A lender may require private mortgage insurance (PMI) primarily to protect against potential losses if the borrower defaults on the loan, especially when the borrower is making a low down payment. When a borrower puts less than 20% down, there is a higher risk for the lender because the borrower has less equity in the property. PMI is designed to mitigate that risk, providing the lender with compensation in case the borrower fails to repay the loan.

This coverage is particularly important for lenders as it allows them to offer loans to borrowers who may not have sufficient funds for a substantial down payment, helping to facilitate homeownership opportunities even for those with limited savings.