What is the primary risk covered by mortgage default insurance?

Mortgage default insurance is primarily designed to protect lenders against the risk of defaults on mortgages. When a borrower fails to make their mortgage payments, it can result in significant financial losses for the lender. This insurance ensures that the lender will recover some of their losses in the event of a mortgage default, allowing them to lend money to borrowers who may have a smaller down payment or are viewed as higher-risk individuals.

The presence of mortgage default insurance is particularly important in helping first-time homebuyers or those with lower incomes secure mortgages, as it mitigates the lender’s risk and ultimately supports access to financing for more individuals. In contrast, property damage, market fluctuations, and negative equity are related concerns but are not the primary focus of mortgage default insurance. Property damage is typically covered by homeowners’ insurance, market fluctuations affect property values but not directly the lender's risk of default, and negative equity is a situation where a borrower owes more than the property is worth, which is not the primary risk addressed by this type of insurance.