What is the primary purpose of mortgage insurance?

The primary purpose of mortgage insurance is to protect the lender against losses if the borrower defaults on the loan. Mortgage insurance, often required when a borrower makes a down payment of less than 20%, provides a safeguard for lenders against the financial risk associated with lending to borrowers who might be more likely to default. This insurance helps reduce the lender's potential losses by compensating them for a portion of the outstanding loan balance in the event of a foreclosure.

This mechanism allows lenders to offer loans to borrowers who may not have substantial equity in the home, thereby facilitating homeownership for a wider range of individuals. Consequently, even when a borrower fails to make payments, the lender can recover some of their investments, making the mortgage system more stable and promoting lending activity overall.