What is the purpose of private mortgage insurance (PMI) as a safety feature for lenders?

Private mortgage insurance (PMI) serves the fundamental purpose of protecting lenders against potential losses that may arise if a borrower defaults on their mortgage. When a borrower is unable to make their mortgage payments, PMI allows the lender to recoup some of the financial loss incurred from the default. This insurance is particularly important when a borrower makes a down payment of less than 20% of the home's purchase price, as this increases the lender's risk.

The existence of PMI can encourage lenders to approve loans for borrowers who may not have substantial down payments, making homeownership more accessible. In this sense, PMI acts as a safety net for lenders, ensuring that they are somewhat shielded from the risk associated with lower equity positions.

The other options, while they may refer to important aspects of real estate and lending, do not accurately capture the primary function of PMI in the context of lender protection. Therefore, recognizing that PMI is specifically designed as a safeguard against the financial repercussions of borrower default is crucial for understanding its role in the mortgage landscape.