Which type of loan provides substantial protection to lenders in case of borrower default?

The correct answer pertains to the VA loan, which is designed to provide significant protection to lenders in the event of borrower default. VA loans are backed by the U.S. Department of Veterans Affairs, which guarantees a portion of the loan. This guarantee reduces the lender's risk, as they can recoup some of their losses even if the borrower fails to make payments. This protection encourages lenders to offer favorable terms, such as no down payment and competitive interest rates, making homeownership more accessible for veterans and service members.

In contrast, conventional loans are not backed by any government entity, which means lenders assume higher risk, especially if the borrower defaults. FHA loans, while providing some level of security to lenders through mortgage insurance, do not offer the same level of backing as a VA loan. Subprime loans typically cater to borrowers with lower credit ratings and come with higher risks, which means they also lack the protective features found in VA loans. Overall, the VA loan's guarantee is a key factor that enhances lender confidence and ensures protection in case of borrower default.