Which benefit does mortgage insurance provide to lenders?

Mortgage insurance is designed fundamentally to protect lenders against potential losses that may arise when a borrower defaults on their loan. When a borrower fails to make their mortgage payments and goes into default, especially in cases where the down payment is low or the borrower poses a higher risk, the lender faces significant financial risk. Mortgage insurance mitigates this risk by compensating the lender for a portion of the loan amount should foreclosure occur.

This protection is crucial for lenders, as it allows them to continue extending loans to individuals who may not meet traditional creditworthiness standards or who are borrowing with a smaller down payment, promoting broader access to homeownership.

In contrast, other options do not accurately represent the primary function of mortgage insurance. While better loan approval rates might be an outcome of various factors in lending, it is not a direct result of mortgage insurance alone. Decreasing the total loan amount or guaranteeing funding for all loans are not aspects associated with mortgage insurance, as this financial product does not alter the terms or the amount of the loan itself. Instead, it acts solely as a risk management tool for lenders facing potential borrower default.