Under which circumstance might a lender require private mortgage insurance?

A lender typically requires private mortgage insurance (PMI) when the borrower is unable to provide a down payment of at least 20% on a conventional loan. This requirement exists because a smaller down payment increases the lender's risk; if the borrower defaults on the mortgage, there is less equity in the home to recover losses. PMI mitigates this risk by providing the lender with insurance coverage in case the borrower fails to repay the loan, effectively protecting the lender's financial interest.

In contrast, a down payment of 25% or more significantly reduces the lender's risk and typically eliminates the need for PMI. A Federal Housing Administration (FHA) mortgage has its own insurance requirements, which differ from conventional loans and do not involve private mortgage insurance. Additionally, wanting a lower interest rate does not directly correlate with PMI requirements, as PMI is specifically related to the size of the down payment rather than the interest rate on the loan.