What type of insurance is required if a borrower has a down payment of less than 20%?

• A. Title Insurance
• B. Homeowner's Insurance
• C. Private Mortgage Insurance (PMI)
• D. Flood Insurance

Answer: (C)

When a borrower makes a down payment of less than 20% on a home purchase, the lender typically requires Private Mortgage Insurance (PMI). This insurance protects the lender in the event that the borrower defaults on the loan. The rationale behind this requirement is that a lower down payment increases the risk for the lender, as there is less equity in the property. PMI mitigates this risk by providing a financial cushion for the lender.

Title Insurance is intended to protect against issues related to ownership and title disputes, while Homeowner's Insurance provides coverage for damages to the home and personal property. Flood Insurance is a specific type of insurance that protects against flood-related damages, which can be required depending on the property's location. However, none of these insurances serve the same purpose as PMI, which is specifically related to the borrower's down payment and the associated risk for the lender.