How does a property qualify for PMI?

Recently found a foreclosure property in a neighborhood that has not been fully developed. Due to the slow nature of the area and lack of listings in a 2 mile radius our lender has denied PMI on our mortgage. Conv. mortgage has been approved. We had chosen to only put 10% down and not deplete our liquid funds. They gave us three options: (1) put additional 10% down (2) change mortgage to FHA or (3) search for another PMI provider. Is this common for an underwriter to deny PMI and what other options are there?