What does mortgage insurance cover in an 80/20 loan scenario?

In an 80/20 loan scenario, the mortgage insurance specifically covers the portion of the loan that exceeds 80% of the property's appraised value. In this case, the borrower typically finances 80% of the property through a primary mortgage, and the remaining 20% is often financed through a second mortgage or home equity line of credit.

The inclusion of mortgage insurance is crucial in this arrangement because it protects lenders against default on the portion of the loan that surpasses 80% of the property’s appraised value. Since loans above this threshold pose a higher risk to lenders, mortgage insurance helps mitigate that financial risk by providing coverage in the event of borrower default. Thus, the correct answer reflects the purpose of mortgage insurance in an 80/20 loan: it specifically addresses the additional risk associated with that portion of the loan, which is above the standard 80%.