What serves as protection for lenders in case of foreclosure when a borrower has less than 20% down payment?

Private Mortgage Insurance (PMI) serves as protection for lenders in cases where a borrower makes a down payment of less than 20%. When a borrower is unable to provide a significant amount of equity upfront, PMI mitigates the risk for the lender by covering a portion of the lender's losses in the event that the borrower defaults and foreclosure occurs.

This insurance facilitates loan approval for borrowers who might otherwise be unable to secure financing due to the lower equity stake. Even though PMI is an additional cost for borrowers, it opens up opportunities for homeownership by allowing them to purchase a home with a smaller down payment.

Other options do not serve the same purpose. Mortgage Insurance Premium (MIP) is specific to FHA loans and is not applicable in all situations. A Conditional Commitment typically relates to the terms set by the lender rather than an insurance product, and a Certificate of Reasonable Value (CRV) is relevant to VA loans, assessing the property's value for veteran borrowers, rather than addressing the lender's risk in relation to down payments.