Nationwide Mortgage Licensing System (NMLS) Practice Exam

The primary function of Mortgage Insurance Premium (MIP) is to protect the lender against borrower default. MIP is typically required for loans that have a lower down payment, such as FHA loans. When a borrower pays MIP, it provides a safety net for the lender in the event that the borrower is unable to repay the loan. This reduces the lender's risk, enabling them to offer loans to borrowers who might not qualify under traditional lending criteria. By mitigating the financial risk associated with potential defaults, MIP helps ensure that lenders can continue to provide financing to a broader range of borrowers.

The other options, while related to mortgage financing, do not accurately describe the primary function of MIP. For instance, MIP does not protect against rising interest rates; rather, it functions more to secure the lender from loss. Additionally, it does not guarantee loan approval, as approval depends on various factors including creditworthiness and income. Lastly, while mortgage insurance premiums may have certain tax implications, they are not primarily designed to offer tax deductions.