The correct answer highlights a common practice in the mortgage process regarding default insurance, particularly in Canada. Typically, the lender pays the default insurance premium upfront in a lump sum, which insures the lender against the risk of loss in case the borrower defaults on their mortgage. This premium can then be added to the mortgage amount and subsequently amortized over the life of the mortgage.
This method of management allows for a smoother financial arrangement since borrowers are not required to pay a large sum at the outset. Instead, the cost is spread out over the mortgage term, making it more manageable for the borrower in their monthly payments.
In contrast, while the other options might suggest alternative payment methods or responsibilities, they do not accurately represent how default insurance is typically handled in practice. The direct payment by the borrower during the application process or the idea that the mortgage lender covers the insurance without any implications for the borrower does not align with the standard arrangements in Canadian mortgage agreements.