What is the primary purpose of a mortgage insurance policy?

The primary purpose of a mortgage insurance policy is to ensure the lender against loan defaults. When a borrower takes out a mortgage, especially with a lower down payment, the risk for the lender increases because there is less equity in the property. Mortgage insurance protects lenders from potential losses in the event that the borrower fails to make their payments, leading to foreclosure. This added layer of protection allows lenders to offer loans that they might not otherwise approve, enabling more borrowers to access home financing.

The other options, while important in their own right, do not accurately reflect the main purpose of mortgage insurance. Coverage for damages to the property pertains to homeowners' insurance, which protects the borrower’s investment in the home itself. Protection against borrower fraud is usually addressed through different regulatory and legal measures, rather than through mortgage insurance. Additionally, while some mortgage insurance might indirectly influence loan terms, its primary role is not to lower interest rates, but to serve as a safeguard for lenders in case of default.