What type of insurance protects lenders from losses due to mortgage defaults?

Mortgage default insurance is specifically designed to protect lenders against losses that may occur when a borrower defaults on their mortgage. This type of insurance is particularly important in situations where the borrower has a low down payment, which increases the lender's risk. When a borrower fails to meet the repayment obligations, the insurance provides compensation to the lender for a portion of the incurred losses.

By requiring mortgage default insurance, lenders can offer loans to borrowers who might otherwise be considered too risky, thus expanding access to home financing. This insurance is commonly required for high-ratio mortgages, where the down payment is less than 20% of the home’s value.

In contrast, property insurance covers damage to the physical property, title insurance protects against issues related to property ownership, and liability insurance provides coverage against legal claims of injury or damage; none of these directly address the issue of mortgage defaults or protect lenders from associated losses.