What protects a lender in case a borrower defaults on a conventional loan?

Private mortgage insurance (PMI) is designed specifically to protect lenders in the event that a borrower defaults on a conventional loan, particularly when the borrower is unable to provide a substantial down payment. When a borrower puts down less than 20% of the purchase price, lenders typically require PMI to mitigate their risk. This insurance ensures that the lender can recover a portion of the loan balance if the borrower fails to repay the loan and the property is foreclosed.

Homeowners insurance, while important, primarily protects the homeowner from losses related to property damage or liability claims, not the lender’s financial interests directly. FHA insurance is associated with loans backed by the Federal Housing Administration; it is not applicable to conventional loans. Credit insurance covers personal loans or credit card debt and does not offer protection for mortgage lenders against default on a home loan.