Private mortgage insurance (PMI) is Insurance that covers mortgage lenders if the borrower defaults on the mortgage. It is nearly always required for loans exceeding 80 percent of the property value or purchase price.
Mortgage insurance is almost always required whenever borrowers finance more than 80 percent of a home’s value or purchase price. Government mortgages are insured by the agencies that oversee them – the FHA, USDA and VA, using premiums paid by borrowers.
For conventional mortgages (non-government), insurance can be purchased from private insurers, and in that case it’s called private mortgage insurance or PMI.
In that case, the borrower is evaluated not just by the lender, but also by the mortgage insurer. The cost of mortgage insurance is based on the borrower’s credit score and the mortgage loan-to-value (LTV). Higher LTV mortgages have more expensive PMI premiums, but borrowers with higher credit scores pay lower PMI premiums.
Mortgage insurance is not for the borrower’s protection; it’s for the lender, and it kicks in if the proceeds from a foreclosure sale don’t cover what the lender is owed – the mortgage insurance covers some or all of the loss.
Learn more about private mortgage insurance.