Which insurance is required for FHA loans to protect the lender in case of borrower default?

The correct answer is Mortgage Insurance Premium (MIP) because it is specifically required for Federal Housing Administration (FHA) loans. MIP protects the lender against potential losses if the borrower defaults on the loan. Unlike typical homeowner's insurance, which protects the property against damage, MIP serves as a safety net for lenders, ensuring that they can recover their investment even if the borrower fails to meet repayment obligations.

MIP must be paid upfront at closing and can also be included in the monthly mortgage payments, which distinguishes it from other types of insurance. This unique requirement addresses the risk associated with low down payments often associated with FHA loans, allowing borrowers to access financing that might otherwise be unavailable.

While homeowner's insurance is important for protecting the property, it does not specifically cover lender interests. Private Mortgage Insurance (PMI) typically applies to conventional loans rather than FHA loans. Title insurance protects against issues related to property ownership and is not relevant to borrower defaults. Thus, MIP is the essential insurance type required for FHA loans, ensuring lender protection in instances of borrower default.