Lenders require private mortgage insurance (PMI) on most loans with less than a 20 percent down payment. They believe there is a correlation between borrower equity and default. They have found that the less money borrowers put down, the more likely they are to default on a loan. PMI guarantees the lender will not lose money if this happens and a foreclosure is necessary.
A growing number of private lenders, however, are loosening up their requirements for low-down payment loans. In fact, the Homeowners Protection Act states that PMI must be dropped on any loan originated after July 29, 1999. Borrowers can request that PMI be canceled when they pay down the principal balance on their mortgage loans to 80 percent of the purchase price. Lenders must automatically cancel PMI when the balance hits 78 percent.