Why is PMI required?

PMI, or Private Mortgage Insurance, is required primarily to protect lenders against the risk of default by borrowers who make a down payment that is less than 20% of the home's purchase price. When a borrower has a lower down payment, it increases the lender's risk because a smaller equity cushion makes it more likely that the borrower may default on the loan. By requiring PMI in such cases, lenders have a financial safety net that can cover potential losses from defaults, allowing them to offer loans to borrowers who might not otherwise be able to secure financing with such a low down payment.

The other options do not accurately reflect the purpose of PMI. A credit score over 700 may indicate a strong borrower but is not related to the necessity of PMI. Property taxes are separate expenses and not covered by PMI. Similarly, while closing costs can be a significant part of the home-buying process, PMI is not designed to assist with these costs. Thus, the requirement for PMI directly correlates with protecting the lender's investment when borrowers have lower equity in the property.