What is the primary risk a lender mitigates by obtaining mortgage insurance?

The primary risk a lender mitigates by obtaining mortgage insurance is default risk from the borrower. Mortgage insurance serves as a safety net for lenders in the event that a borrower fails to make their mortgage payments. When a borrower defaults, the insurance compensates the lender for some or all of the losses they incur due to the unpaid mortgage balance.

This risk is particularly significant for loans with low down payments, as a smaller initial investment from the borrower indicates a higher likelihood of default. By requiring mortgage insurance, lenders can extend credit to a broader range of borrowers, including those who may not have substantial savings for a down payment. This mechanism promotes responsible lending practices, allowing lenders to manage potential losses while enabling more individuals to achieve homeownership.

In contrast, risks such as market volatility, interest rate fluctuations, and property appreciation relate to market conditions and property values, but they do not directly tie into the borrower's ability to repay the loan, which is at the heart of the need for mortgage insurance.