Which type of mortgage usually involves private mortgage insurance (PMI)?

The correct choice involves conventional loans with less than 20% down. Private mortgage insurance (PMI) is typically required by lenders for conventional loans when the borrower makes a down payment that is less than 20% of the home's purchase price. The purpose of PMI is to protect the lender in case the borrower defaults on the loan. Since a smaller down payment represents a higher risk for the lender, they often mandate PMI to mitigate that risk.

In contrast, conventional loans with 20% down do not typically require PMI since the larger equity stake reduces the lender’s risk. Government-backed loans, like those insured by the Federal Housing Administration (FHA), have their own forms of insurance but do not specifically use PMI in the same way as conventional loans. FHA loans include an upfront and ongoing mortgage insurance premium (MIP) instead of PMI.