Which financial aspect does FHA mortgage insurance protect lenders against?

FHA mortgage insurance serves as a safeguard for lenders primarily against borrower default. When a borrower is unable to meet their mortgage payments, this insurance protects the lender by compensating them for a portion of the loss incurred. This feature is particularly essential for lenders because FHA loans are often issued to borrowers with lower credit scores or smaller down payments, which inherently carry higher risks of default. By requiring mortgage insurance, the FHA ensures that lenders are willing to provide loans to a broader range of borrowers, thereby encouraging homeownership, especially among those who might otherwise face barriers to financing.

In contrast, home depreciation, market fluctuations, and interest rate changes do not fall under the protective measures provided by FHA mortgage insurance. While these factors can impact the overall financial health of a property and the borrower, they do not specifically relate to the risk of borrower default, which is the core concern that the FHA mortgage insurance addresses.