What happens when a borrower opts for a loan with less than 20% down payment?

When a borrower opts for a loan with less than a 20% down payment, the lender typically requires Private Mortgage Insurance (PMI). This requirement is in place because a lower down payment signifies a higher risk for the lender. Without sufficient equity in the property, the lender's investment is not as secure. PMI serves as a safeguard for the lender in case the borrower defaults on the loan. By requiring PMI, the lender can mitigate potential losses due to foreclosure.

While it is true that some lenders or loan programs may allow borrowers to avoid PMI under certain conditions, such as utilizing a second mortgage or a more complex financing structure, the standard practice is to require it for loans with down payments below 20%. This ensures that the lender is protected in a market where property values may fluctuate, which can affect the borrower's ability to pay back the loan.