What type of insurance protects the lender against a borrower's default?

The correct choice of mortgage insurance is significant because it serves a specific purpose in real estate finance. Mortgage insurance protects the lender in case the borrower defaults on their loan. This type of insurance is particularly common in scenarios where the borrower has a low down payment, typically less than 20% of the home’s purchase price. Without adequate equity, lenders face greater risk, and mortgage insurance mitigates that risk, allowing them to offer loans to borrowers who otherwise might not qualify due to lower down payments.

Homeowners insurance, on the other hand, protects the homeowner from damage to the property or liabilities that arise from accidents on the premises, but it does not cover mortgage payments if a borrower defaults. Title insurance protects against issues such as defects in title or ownership claims but does not relate to borrower performance. Liability insurance safeguards individuals from claims resulting from injuries or damage to others but is not related to mortgage obligations. Thus, in the context of protecting the lender against defaults, mortgage insurance is the appropriate and necessary safeguard.