PSI Virginia Real Estate Practice Exam

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What does Private Mortgage Insurance (PMI) protect?

Lenders from financial loss in case of default
Homeowners from property taxes
Borrowers against natural disasters
Real estate agents from commission disputes

The correct answer is: Lenders from financial loss in case of default

Private Mortgage Insurance (PMI) serves as a protective measure primarily for lenders when a borrower defaults on a mortgage loan. By requiring PMI, lenders mitigate their financial risk, especially when the borrower's down payment is less than 20% of the home's purchase price. In the event of foreclosure, the PMI can cover a portion of the lender's losses, thereby encouraging them to approve loans to borrowers who may not have a significant equity stake in the property. While the other options address various aspects of real estate and homeowner responsibilities, they do not pertain to the specific function of PMI. For instance, PMI does not provide any benefits regarding property taxes, nor does it safeguard borrowers against natural disasters or protect real estate agents from commission disputes. Understanding PMI's role helps borrowers make informed decisions when financing a home, especially in situations where lower down payments are necessary.