What type of insurance protects a lender if a borrower defaults on a conventional loan?

Private mortgage insurance (PMI) is specifically designed to protect lenders in the event that a borrower defaults on a conventional loan. When a borrower is unable to make a down payment of at least 20% of the home's value, lenders often require PMI to mitigate their risk. In the case of default, PMI ensures that the lender can recover some of their losses. This type of insurance provides a level of financial security for lenders, making it easier for borrowers with lower down payments to qualify for loans.

Homeowners insurance, while crucial for protecting the property itself against various damages, does not offer any protection to lenders regarding borrower default. Title insurance protects against issues related to the ownership of the property and does not pertain to borrower defaults. Hazard insurance is similar to homeowners insurance and covers specific risks to property but does not help lenders recover losses due to loan defaults. Understanding these distinctions is essential in real estate finance as it ensures clarity regarding the protections available to both lenders and borrowers.