What can happen if a borrower defaults on a loan and the property is worth less than what is owed?

When a borrower defaults on a loan and the property's value is less than the outstanding mortgage balance, the lender may indeed lose money on the property. This situation is often referred to as being “underwater” on a mortgage.

In this case, if the lender were to foreclose on the property and sell it, they would likely receive a sale price that is below what the borrower owed on the mortgage. The loss incurred by the lender represents the difference between the loan amount and the proceeds from the sale of the property. This potential financial loss for the lender is a significant risk associated with mortgage lending, particularly in fluctuating real estate markets.

The other options do not accurately reflect the situation. The borrower would not gain equity; instead, they would be losing the equity they had in the home due to the loan default. The property does not automatically return to the lender without a formal foreclosure process, and the mortgage is typically not forgiven just because the borrower is in default; such situations usually require the lender to pursue specific legal actions.