Mortgage Loan Originator (MLO) Licensing Practice Test

The correct answer is mortgage insurance premium (MIP). When it comes to FHA loans, this type of insurance is specifically designed to protect the lender in case of default. FHA loans are often extended to borrowers with lower credit scores and smaller down payments, which increases the lender's risk.

MIP is often required for the entire life of the loan, unless the borrower makes a significant down payment, at which point they may qualify for a reduced insurance premium. This premium ensures that even if a borrower defaults on an FHA loan, the lender will recover some of their losses through the insurance payout.

While homeowner's insurance is a critical protectant for the borrower's asset, private mortgage insurance (PMI) typically applies to conventional loans and not FHA loans. Title insurance is another form of insurance that protects against financial loss due to defects in a title to real property, but it is unrelated to the mortgage insurance premiums required specifically by FHA guidelines.