What is the primary risk to a lender if a borrower defaults?

A lender's primary risk when a borrower defaults is the potential financial loss from the unpaid loan balance and the costs associated with foreclosure. When a borrower fails to make payments as agreed, the lender must typically initiate a foreclosure process to recover the property. This process can be lengthy and costly, involving legal fees, administrative costs, and possibly a decrease in the property's market value, which can further erode the lender's financial recovery.

In contrast, the other options do not represent risks to the lender in the context of borrower default. The rise in property value during the loan term is not a risk—it could be an advantage for the lender, as it might allow them to recoup losses if the property needs to be sold after a foreclosure. Similarly, a reduction in interest rates during the loan period is not directly related to borrower default; it may affect refinancing options but does not represent a loss associated with default. Lastly, an increase in the borrower's credit score isn't relevant to the lender's risk in the event of default, as it does not mitigate the financial impact of unpaid loans or foreclosure costs.