What is the primary purpose of mortgage default insurance?

Mortgage default insurance primarily serves to protect lenders against potential losses when a borrower defaults on their mortgage payments. This type of insurance provides financial security and reduces the risk associated with lending, particularly for high-ratio mortgages where the down payment is less than 20% of the property's value. In such cases, lenders face a higher risk of loss if the borrower fails to repay the loan.

By having mortgage default insurance, lenders can feel more secure in approving loans since the insurance can cover a portion of their losses, allowing them to offer mortgages to a broader range of borrowers, including those with less substantial down payments or poorer credit histories. This insurance ultimately contributes to the stability of the mortgage market.

Other choices, while related to the mortgage process, do not accurately capture the primary function of mortgage default insurance. For example, it is not intended to protect borrowers from high-interest rates or ensure their qualification for loans, nor does it cover property taxes, as these concerns are managed through different mechanisms in the loan and property ownership processes.