Why might a borrower need private mortgage insurance (MI)?

A borrower may need private mortgage insurance (MI) primarily to protect lenders on high loan-to-value (LTV) loans. When a borrower is unable to provide a significant down payment—typically less than 20%—the risk associated with default increases for the lender. Private mortgage insurance serves as a financial safeguard, enabling lenders to mitigate potential losses if the borrower defaults on the loan. This protection encourages lenders to approve mortgages for borrowers who might otherwise be deemed too risky or ineligible, thus making homeownership more accessible.

The concept of high LTV loans is important in this context; as the LTV ratio increases (meaning the loan amount is high relative to the property value), so does the perceived risk for the lender. MI helps offset this risk, which is particularly critical in today's housing market where many first-time homebuyers struggle to save for substantial down payments.