What type of insurance protects a lender from loss when a borrower defaults on the loan?

Mortgage insurance is specifically designed to protect a lender against the risk of loss when a borrower defaults on a loan, particularly in the context of residential mortgages. This type of insurance is typically required when the borrower makes a down payment that is less than 20% of the home's purchase price. By securing the loan with mortgage insurance, the lender mitigates the financial risk associated with the potential for default.

When a borrower defaults, the mortgage insurance pays the lender a portion of the outstanding loan balance, thus reducing the lender's losses. This is especially important in situations where the property value may not cover the amount owed on the mortgage. Mortgage insurance enhances the lender's security, allowing them to lend to borrowers with less equity in the property.

The other types of insurance do not serve this purpose. Life insurance provides financial protection to beneficiaries upon the insured's death and is not tied to loan defaults. Property insurance protects against loss or damage to the property itself, such as due to fire or theft, but does not cover the lender's risk in case of borrower default. Title insurance protects against defects in the title or ownership of the property but does not provide coverage related to borrower default on the mortgage.