What is the purpose of private mortgage insurance?

Private mortgage insurance (PMI) serves the specific purpose of protecting the lender in the event that a borrower defaults on a conventional loan. When a borrower is unable to provide a down payment of at least 20% of the home's purchase price, lenders often require PMI as a risk mitigation tool. This insurance helps cover the financial loss that a lender might incur if they have to foreclose on the property and the sale does not recoup the outstanding loan amount.

While there are other benefits associated with PMI for borrowers, like enabling them to secure a mortgage with a lower down payment, the primary function remains focused on lender protection. This insurance is particularly useful in protecting financial institutions from potential losses and encourages them to lend to borrowers who might not have substantial upfront capital.

In contrast to the other options, which either misrepresent the role of PMI or suggest benefits that do not accurately reflect its core purpose, the correct choice highlights the essential aspect of risk coverage for lenders facing potential borrower default scenarios.