What typically happens if a borrower defaults on their loan?

When a borrower defaults on their loan, the lender typically has the right to seize the property through a legal process known as foreclosure. This occurs because the mortgage is secured by the property itself; thus, if the borrower fails to meet their repayment obligations, the lender can take possession of the property to recover the remaining debt.

Foreclosure is a serious consequence of defaulting on a loan and is a primary recourse for lenders to mitigate their financial losses. This process can vary by state but generally involves the lender filing a public notice and a judicial or non-judicial process to reclaim the property.

The other options presented do not accurately reflect what typically happens in the event of a loan default. For instance, the automatic conversion to an FHA loan is not a standard process for defaulting borrowers, nor can borrowers refinance instantly without meeting specific conditions. Additionally, lenders typically do not forgive debts simply due to default; they seek recovery of the owed amount, which commonly leads to foreclosure if the borrower fails to remedy the default.