What is the purpose of Lenders Mortgage Insurance (LMI)?

• A. Insurance covering borrower default.
• B. Insurance protecting the lender against borrower default.
• C. Insurance covering the property against damage.
• D. Insurance not related to the loan.

Answer: (B)

Lenders Mortgage Insurance serves to protect the lender from losses if a borrower with a high loan-to-value ratio defaults on the loan. If default occurs and the sale of the property doesn’t fully cover the outstanding debt, the insurer pays the lender up to the policy limit. It’s not aimed at protecting the borrower, nor is it insurance for property damage—that would be a separate homeowners’ or property policy. The borrower usually pays the LMI premium, and having LMI allows lenders to approve loans with smaller deposits. So the purpose is to shield the lender from borrower-default risk.