What role does mortgage insurance play in a mortgage loan?

Mortgage insurance serves a crucial function in the realm of mortgage loans, particularly in safeguarding the lender's interests. When a borrower defaults on a loan, which means they fail to meet their repayment obligations, mortgage insurance covers the lender for a portion of the losses incurred. This insurance is especially common in loans where the borrower makes a down payment that is less than 20% of the property's value. Because such loans present a higher risk for lenders, mortgage insurance becomes a mitigative tool that allows them to recover some of their losses in cases of default.

This risk management aspect is fundamental; without mortgage insurance, lenders would be more cautious about underwriting loans to borrowers who might otherwise have difficulty securing financing due to a low down payment. Therefore, the existence of mortgage insurance enhances a lender's ability to provide loans to a broader range of borrowers while maintaining a safety net for themselves in the event of borrower default, thus fostering a more accessible housing market.