Which type of insurance is typically issued for the loan amount as collateral protection for the lender?

Mortgage insurance is specifically designed to protect lenders in the event that a borrower defaults on their home loan. This type of insurance typically covers the lender's risk when a buyer is unable to provide a large down payment, which can result in higher-risk loans. Mortgage insurance is often required for conventional loans with a down payment of less than 20%, helping safeguard the lender's financial investment.

In scenarios involving default, this insurance benefits lenders by covering some or all of the outstanding loan amount, thereby enabling the lender to recover its losses. This type of insurance is directly tied to the loan amount, providing collateral protection for the lender, which is why it is distinct from other types of insurance related to homeownership.

Homeowners insurance, for example, protects the homeowner against damages to their property from various risks such as fire, theft, or natural disasters. Lender title insurance protects against defects in the title of the property, while property insurance usually refers to policies that protect against physical damage to the property, such as homeowners’ insurance. Each of these serves different purposes and does not specifically function as collateral protection for the loan amount in the same way that mortgage insurance does.