Who does PMI (Private Mortgage Insurance) apply to?

Private Mortgage Insurance (PMI) is specifically designed to protect lenders against the risk of default by borrowers who make a smaller down payment on a conventional loan. When a borrower puts down less than 20% of the home’s purchase price, lenders typically require PMI as a way to mitigate their risk. This requirement is particularly common with conventional loans, which are not insured or guaranteed by the government.

In contrast, FHA loans involve mortgage insurance premiums (MIP), which are different from PMI and are required regardless of the down payment amount. VA loans, on the other hand, do not require insurance premiums as they are guaranteed by the Department of Veterans Affairs. Therefore, PMI is specifically applicable only to conventional loans, making the choice highlighting this point the correct answer. Understanding the differences between these insurances is essential for navigating the loan options available to borrowers.