Which loan type typically requires private mortgage insurance (PMI)?

Private mortgage insurance (PMI) is typically required for conventional loans when the borrower makes a down payment of less than 20% of the home’s purchase price. This insurance serves as a safeguard for lenders in case the borrower defaults on the loan. The requirement for PMI is specifically linked to the level of risk associated with lower down payments; when the down payment is less than 20%, lenders view the loan as a higher risk and thus, PMI is implemented to mitigate that risk.

FHA loans have a different insurance requirement known as mortgage insurance premium (MIP), which applies regardless of the down payment amount. VA loans, available to eligible veterans, typically do not require PMI, which is a significant benefit of this type of financing. Interest-only loans can have varying requirements for PMI depending on the lender's policies and the size of the down payment, but they are not inherently tied to PMI based on the loan type alone. Therefore, the option that refers to conventional loans with a down payment of less than 20% accurately describes when PMI is needed.