Which type of insurance protects the lender against borrower default when the loan-to-value ratio exceeds 80%?

Mortgage Insurance (MI) is designed specifically to protect lenders against default by borrowers when the loan-to-value (LTV) ratio exceeds 80%. When a borrower makes a down payment that is less than 20% of the home’s purchase price, the risk to the lender increases because there is less equity in the property. To mitigate this risk, lenders typically require borrowers to obtain mortgage insurance.

This insurance offers a type of financial safety net for the lender, ensuring that in the event of default, they can recover a portion of the loan amount. Mortgage insurance premiums are often added to the monthly mortgage payment, allowing borrowers to secure financing even with a lower down payment. It's an essential tool that enables access to homeownership for many who cannot afford a substantial initial investment.

Homeowner's Insurance and Property Insurance, while vital for protecting the home itself and covering potential damage, do not serve to protect lenders from borrower default. Borrower Protection Insurance is not a standard term commonly recognized in the mortgage industry. Hence, these options do not align with the specific function of safeguarding the lender's financial interests in cases of borrower default associated with high LTV ratios.