What type of mortgage insurance protects lenders in case a borrower defaults?

Private mortgage insurance (PMI) protects lenders in the event that a borrower defaults on their loan. When borrowers make a down payment of less than 20% of the property's purchase price, lenders typically require PMI to mitigate the risk associated with lower equity. This insurance compensates lenders for losses incurred if the borrower is unable to repay the loan.

The presence of PMI allows buyers to purchase homes with smaller down payments, aiding those who may not have substantial savings. It's crucial for buyers to understand that PMI does not protect them; rather, it serves as a safety net for the lender.

Other options, like federal mortgage insurance, also exist but usually pertain to government-backed loans such as FHA loans, which operate under different conditions. Life insurance on the borrower does not cover the loan directly and is intended to provide for the borrower's beneficiaries. Loan insurance, as a term, is not standard in the context of protecting lenders in mortgage scenarios. Therefore, the correct answer emphasizing lender protection in the case of borrower default is private mortgage insurance.