When is Private Mortgage Insurance (PMI) typically required?

• A. Not required in any case
• B. Required for all loans
• C. Only for VA loans
• D. Typically required when the down payment is less than 20% of the purchase price (or LTV above 80%)

Answer: (D)

PMI is an insurance that protects lenders when a borrower has a smaller down payment. It’s typically required on conventional mortgages when the down payment is under 20% of the purchase price, or equivalently when the loan-to-value is above 80%. Lenders rely on this extra protection because there is less borrower equity early in the loan, so PMI offsets part of the risk of loss if the borrower defaults. If you put down 20% or more, PMI is usually not required on a conventional loan. Note that other loan types work differently: VA loans generally don’t require PMI, and FHA loans use mortgage insurance (MIP) rather than PMI. PMI can often be canceled once you reach about 20% equity, subject to loan terms and payment history.