They have settled there illegally and their presence has been imposed by force. Additionally, they will never accept to be ruled by Palestinians.
Be realistic, there is no practical way it can work on short-term or even middle-term. Both Israeli settlers remaining inside a Palestinian State, and Palestinian refugees returning to Israel are completely illusory options
It could be that on a longer term (like 50 years) the two States may make a reciprocal agreement, but not on short-term.
Of course, there will be some border adjustments in case of a two-State solution, to include some settlements located near the border.