What is the role of private mortgage insurance in relation to lenders?

Private mortgage insurance (PMI) plays a crucial role in mitigating the risk for lenders, especially when borrowers make a down payment of less than 20% of the home’s purchase price. By providing a financial safety net, PMI allows lenders to recover some of their losses if a borrower defaults on the mortgage. This protection is especially important in the lending environment, where defaults can lead to significant financial repercussions for lenders.

In essence, when PMI is in place, lenders are more willing to extend loans to borrowers who may not yet have substantial equity in the property. This has the dual benefit of enabling more people to achieve homeownership while ensuring that lenders have a layer of security against potential financial loss. This is why the statement regarding PMI protecting lenders against losses from defaults is accurate and highlights the function of PMI in the lending landscape.