Question 35

The purpose of private mortgage insurance is to protect the lender if the borrower defaults.

Private mortgage insurance (PMI) is designed to safeguard the lender's investment in the event that the borrower fails to repay the loan. This insurance reduces the lender's risk when providing loans to borrowers who may not meet the standard down payment requirements.

A) pay off the loan if the borrower dies or is disabled

This option is incorrect as private mortgage insurance does not provide benefits in the event of the borrower's death or disability. Such coverage would typically fall under life insurance or disability insurance, not PMI.

B) protect the lender if the borrower defaults

This option is correct because the primary function of private mortgage insurance is to protect the lender's financial interests in case the borrower defaults on their mortgage payments. PMI allows lenders to extend credit to borrowers who might otherwise be viewed as high-risk.

C) provide coverage in the event of fire or disaster

This option is incorrect since PMI does not cover property damage from fire or disaster. Homeowners typically need separate homeowners insurance to protect against such risks, which is distinct from the coverage provided by PMI.

D) protect the borrower against problems that occur with the title

This option is incorrect as well, as PMI does not provide any protection related to issues with the title of the property. Title insurance is a separate product that protects the borrower from title-related claims or disputes.

Conclusion

Private mortgage insurance is essential for protecting lenders from the financial impact of borrower defaults, which is why option B is the correct answer. The other options misrepresent the functions of PMI, focusing on areas such as personal insurance and property coverage that fall outside the scope of private mortgage insurance.