What may happen if a borrower's down payment is less than 10 percent?

When a borrower's down payment is less than 10 percent, it typically triggers the requirement for private mortgage insurance (PMI). PMI is designed to protect the lender in the event that the borrower defaults on the loan. This is necessary because a lower down payment indicates a higher risk for the lender; there is less equity in the home from the start. By having PMI, lenders mitigate their risk, allowing borrowers who may not have enough for a larger down payment to still qualify for a mortgage.

This requirement is common in many lending scenarios, particularly with conventional loans. The presence of PMI can add to the monthly cost of a mortgage, but it allows individuals to enter the housing market even if they currently have limited funds for a down payment. Therefore, the answer correctly reflects the relationship between down payments under 10 percent and the subsequent necessity of private mortgage insurance.