What do lenders use to protect against losses from borrower defaults?

What do lenders use to protect against losses from borrower defaults?

• A. Credit reports
• B. Private mortgage insurance
• C. Property appraisals
• D. Interest rate adjustments

Answer: (B)

Lenders use private mortgage insurance (PMI) to protect against losses resulting from borrower defaults, particularly when the borrower is unable to provide a significant down payment. PMI allows lenders to mitigate the risk associated with lending to buyers who have less than 20% equity in the property. If a borrower defaults on their mortgage, PMI can cover a portion of the lender's loss, making it a vital tool in the mortgage industry. This insurance helps lenders feel more secure in extending credit to a larger group of borrowers, including first-time home buyers or those with less financial stability. The borrower usually pays the PMI premium, which can be a monthly cost or a one-time upfront premium, ensuring that the lender has a safety net in the event of default. In contrast, credit reports, property appraisals, and interest rate adjustments play different roles in the lending process. Credit reports help lenders assess the borrower's creditworthiness, property appraisals determine the market value of the property being financed, and interest rate adjustments might reflect changes in market conditions or the borrower's financial situation but do not directly protect lenders against losses from defaults.

Lenders use private mortgage insurance (PMI) to protect against losses resulting from borrower defaults, particularly when the borrower is unable to provide a significant down payment. PMI allows lenders to mitigate the risk associated with lending to buyers who have less than 20% equity in the property. If a borrower defaults on their mortgage, PMI can cover a portion of the lender's loss, making it a vital tool in the mortgage industry.

This insurance helps lenders feel more secure in extending credit to a larger group of borrowers, including first-time home buyers or those with less financial stability. The borrower usually pays the PMI premium, which can be a monthly cost or a one-time upfront premium, ensuring that the lender has a safety net in the event of default.

In contrast, credit reports, property appraisals, and interest rate adjustments play different roles in the lending process. Credit reports help lenders assess the borrower's creditworthiness, property appraisals determine the market value of the property being financed, and interest rate adjustments might reflect changes in market conditions or the borrower's financial situation but do not directly protect lenders against losses from defaults.