What does private mortgage insurance (PMI) protect?

Private mortgage insurance (PMI) serves as a safety net for lenders in the event that a borrower defaults on their mortgage loan. When a borrower makes a down payment of less than 20% of the home’s purchase price, the lender typically requires PMI to mitigate their risk. If the borrower fails to repay the loan, PMI enables the lender to recover some of the losses incurred due to default. This insurance coverage essentially protects the lender’s financial interests by covering a portion of the unpaid loan balance.

While other options suggest various forms of protection, they do not accurately represent the role of PMI. The insurance does not directly protect the borrower from foreclosure, prevent loss of tax revenue for the government, or safeguard real estate agents from lost commissions. Therefore, the primary function of PMI is specifically geared towards protecting lenders from the financial implications of borrower default.