LMI protects a lender (such as a bank) against potential loss in the event of default and mortgagee sale. If the subsequent sale of a bank's security fails to clear the bank's loan in full the mortgage insurance policy will repay the shortfall. The insurance protects the lender, not the borrower. In the case of an ultimate loss (shortfall), an insurer may take action against the borrower to recover the loss. LMI is usually required where a loan to value ratio exceeds 80%.
In most cases, banks have their preferred LMI provider and they will require that a borrower use that provider. LMI is arranged by the lender, not the borrower, although the borrower pays for it. If an LMI provider declines to issue the insurance for an approved loan, the lender may rescind its approval.
