What type of insurance protects the lending institution in conventional loans?

Private mortgage insurance (PMI) is specifically designed to protect lending institutions in the context of conventional loans. When a borrower puts down less than 20% of the home’s purchase price as a down payment, lenders typically require PMI. This insurance mitigates the risk associated with lower down payments, as it compensates the lender in case the borrower defaults on the loan.

PMI allows borrowers to qualify for mortgages they might not otherwise secure, enabling them to enter the housing market sooner. The cost of PMI is usually added to the borrower’s monthly mortgage payment, and it can be cancelled once the borrower reaches a certain level of equity in the home.

In contrast, government mortgage insurance is associated with loans backed by government entities like FHA or VA, homeowner's insurance covers property damage and liability, and title insurance protects against defects in the property title. Each of these options serves different purposes and does not specifically protect lenders in the context of conventional loans like PMI does.