What is the purpose of mortgage default insurance?

Mortgage default insurance serves a crucial role in the lending process by protecting lenders from the financial risks associated with borrower default. When a borrower is unable to make their mortgage payments, the lender may face significant losses, especially if the property needs to be foreclosed and sold at a lower value than the mortgage outstanding. Transitioning this risk to insurance ensures that lenders can recover a portion of their losses, thus enabling them to offer loans to borrowers who might otherwise be considered high-risk.

The requirement for mortgage default insurance often arises when the loan amount exceeds a certain percentage of the property's value, typically around 80%. This insurance allows borrowers to secure financing with lower down payments, making homeownership more accessible while providing a safety net for lenders. By mitigating potential losses, mortgage default insurance fosters a stable lending environment and helps to promote confidence in the housing market.