When is PMI typically required?

Private Mortgage Insurance (PMI) is typically required when the down payment on a home is less than 20% of the home's value. Lenders implement PMI as a risk mitigation tool because a lower down payment suggests a higher risk of default.

When a borrower makes a down payment of less than 20%, the lender views this as a situation where the borrower has less equity in the home. By requiring PMI, the lender ensures that they have a form of protection in case the borrower defaults on the loan. The insurance covers a portion of the lender's potential losses, making it possible for buyers to purchase homes with smaller down payments.

This policy aligns with standard mortgage lending practices, as it helps facilitate homeownership while managing risk for financial institutions. Thus, the requirement for PMI when the down payment is below 20% is a critical concept for potential homeowners and those involved in the mortgage industry.