Which of the following best describes the primary function of mortgage insurance?

The primary function of mortgage insurance is to protect lenders when borrowers default on loans. This type of insurance provides a safety net for financial institutions by ensuring that they recover a portion of their losses in the event that a borrower fails to make payments and the property goes into foreclosure. By mitigating the risk associated with lending to borrowers who may have lower down payments or credit scores, mortgage insurance enables lenders to offer loans to a broader range of applicants.

This coverage is especially important in situations where borrowers are making smaller down payments (typically less than 20% of the home’s purchase price), which is often considered a higher risk for lenders. In such cases, mortgage insurance plays a crucial role in facilitating homeownership by allowing borrowers to access financing that they might not otherwise secure without a substantial down payment.

In contrast, the other options do not accurately capture the primary function of mortgage insurance. For instance, reducing closing costs or guaranteeing lower interest rates are not roles of mortgage insurance; instead, those aspects relate more to other financial products or services. Additionally, improving a borrower’s credit score is not a function of mortgage insurance, as credit scores are determined by individual credit histories and are not directly influenced by having mortgage insurance.