What type of insurance is required on conventional loans when a borrower has less than a 20% down payment?

When a borrower makes a down payment of less than 20% on a conventional loan, private mortgage insurance (PMI) is typically required. This insurance protects the lender in the event that the borrower defaults on the loan. Since a lower down payment represents a higher loan-to-value ratio, the lender faces a greater risk. PMI mitigates this risk by providing the lender with financial compensation if the borrower fails to make payments.

Homeowners insurance is important for protecting the property itself but is not specifically tied to the size of the down payment. Title insurance protects against issues related to the property’s title and is unrelated to the loan-to-value ratio or the down payment. Flood insurance is necessary in certain flood-prone areas but is also not mandated by the size of the down payment on a conventional loan.

Thus, the requirement for PMI is specifically tied to the lower down payment threshold, making it the correct answer for the question regarding insurance on conventional loans.