Nationwide Mortgage Licensing System (NMLS) Practice Exam

What is the primary purpose of private mortgage insurance (PMI)?

1. To protect the lender against losses in case of borrower default

2. To provide insurance for the borrower's life

3. To reduce the homeowner's property taxes

4. To guarantee lower interest rates for the borrower

The correct answer is: To protect the lender against losses in case of borrower default

The primary purpose of private mortgage insurance (PMI) is to protect the lender against losses in case of borrower default. When a borrower does not have a substantial down payment, lenders often require PMI as a safeguard that helps cover the lender's risk in the event that the borrower fails to make their mortgage payments and the property goes into foreclosure. Since PMI allows borrowers to qualify for a mortgage without a 20% down payment, it ultimately facilitates access to homeownership for individuals who may not have large savings. The other options do not accurately reflect the nature or function of PMI. Insurance for the borrower's life would entail a completely different type of policy, typically life insurance, which is unrelated to the mortgage process. Reducing property taxes is not within the remit of PMI, as property taxes are levied by local governments based on property value and are not influenced by mortgage insurance. Lastly, while PMI may indirectly affect mortgage terms, its primary role is not to guarantee lower interest rates; rather, it serves as a risk management tool for the lender.