How does a borrower's default affect FHA-insured loans?

The operational framework of FHA-insured loans is designed to protect lenders against defaults by borrowers. When a borrower defaults on an FHA-insured loan, the Federal Housing Administration steps in to cover the lender's losses. This insurance policy serves to encourage lenders to offer loans to borrowers who may be considered higher risk, as it mitigates the financial risks associated with borrower defaults.

This system of insurance is vital because it allows more individuals, particularly those with lower credit scores or limited financial history, to qualify for home loans that they might otherwise struggle to secure. The assurance that lenders will not bear the full brunt of a borrower's default enhances the overall housing market by facilitating access to credit for a broader range of consumers.

The other options do not accurately reflect the nature of FHA-insured loans: they do have significant implications for lenders, such as no direct increase in loan interest rates due to a default, and while a default could lead to foreclosure proceedings, the outcome isn't automatic unless specific circumstances arise. Thus, the key takeaway is that FHA insurance plays an essential role in minimizing lenders' risks when borrowers default on their loans.