What type of insurance is required for borrowers with less than 20% equity in a conventional loan?

When a borrower has less than 20% equity in a conventional loan, Private Mortgage Insurance (PMI) becomes a requirement. This insurance protects the lender in the event that the borrower defaults on the loan. Since a lower equity position represents a greater risk to the lender, PMI serves as a safeguard against potential losses. Borrowers pay a monthly premium for this insurance, which allows them to secure the loan with less initial equity than would typically be needed.

Homeowners insurance, while also necessary, covers damages to the property itself and protects the owner's assets but does not specifically mitigate lender risk. Title insurance protects against losses related to disputes over the ownership of the property but does not relate to equity positions. Property insurance encompasses coverage for the physical building and might be included in homeowners insurance but isn't what is specifically mandated by lenders when equity is below 20%. Thus, Private Mortgage Insurance is the correct answer in this context, as it directly addresses the lender's need for added security in risky loan scenarios.