What is mortgage insurance designed to do?

Mortgage insurance is primarily designed to protect lenders against losses resulting from borrower defaults. When borrowers take out loans with a lower down payment, lenders face a higher risk in the event that the borrower is unable to repay the loan. Mortgage insurance mitigates this risk by providing a safety net for the lender; if the borrower defaults on the loan, the insurance compensates the lender for some or all of the losses incurred.

This safeguard is particularly important for loans with a down payment of less than 20%, as the chance of default typically increases with lower equity in the property. Mortgage insurance encourages lenders to offer loans to borrowers who may otherwise struggle to qualify for financing, thus expanding access to homeownership.

In contrast, the other options do not accurately represent the purpose of mortgage insurance. For example, protecting borrowers from foreclosure or covering administrative costs are not the primary functions of mortgage insurance, nor does it ensure that property taxes are paid. Instead, the fundamental role is risk mitigation for the lender.