What happens when a borrower defaults on a loan with Mortgage Insurance?

When a borrower defaults on a loan that includes Mortgage Insurance, the insurance serves as a safeguard for the lender against losses incurred due to the borrower's inability to repay the loan. Mortgage Insurance typically covers a portion of the lender's loss up to a specific limit, which allows the lender to recover some of the lost funds resulting from the foreclosure or sale of the property after the default. This coverage is especially important because it enables lenders to offer loans to borrowers who may not have a substantial down payment, knowing that they have some financial protection in case of a default.

In this context, the other options do not fully address how Mortgage Insurance functions. While borrowers do pay mortgage insurance as part of their mortgage payments, this does not adequately encapsulate the implications of a default. The lender does not typically absorb the entire loss, as Mortgage Insurance is intended to cover a portion of it. Lastly, although defaulting on a loan can lead to the seizing of the property through foreclosure, this outcome does not relate directly to how Mortgage Insurance operates in terms of loss coverage.