The PMI Factor - How PMI Compensation Affects the Bank"s Decision to Short Sale a Property
If a homebuyer purchased a home and was not able to provide a 20% down payment, the lender probably required private mortgage insurance (PMI).
Today, many buyers are looking to purchase a home through the short sale process and have concerns about how PMI will impact this sale.
Private mortgage insurance is a failsafe policy for the lender in case the buyer defaults on the loan.
If the homeowner happens to default on the mortgage, the lender will file for foreclosure and will also file a claim against the PMI to recoup up to 20% of the total mortgage for that real estate.
The problem with a short sale on a property with PMI is that often the lender can get more money from the foreclosure of the house than they would through a short sale.
Let's say a homeowner bought a house for $300,000, and wasn't able to come up with the 20% down payment.
Because the loan is for more than 80% of the home's cost, the lender required private mortgage insurance.
Unfortunately, times change and things happen.
Now the homeowner is 90 days behind in the mortgage.
If the lender forecloses on the house, that company could receive up to 80% of the mortgage which would be about $240,000 through PMI.
Now, if the owner were to try to save their credit (and maybe even their dignity) through a short sale, the lender could stand to lose more money.
Chances are the homeowner would have to sell the house at a much lower price than was originally paid and also lower than what is currently owed.
In most real estate investing markets around the country today, the home might bring in an offer between $200,000 and $220,000.
In a short sale, the lender has to pay the closing costs which are about 8%.
This means the lender would need to recoup about 92%.
However, in this scenario if you multiply $220,000 by 0.
92, you get $202,000.
This is the amount the lender would make from a short sale on the house.
In short, the lender would be agreeing to accept $18,000 less than they could get through PMI.
Sometimes you can find someone in real estate investing who would be willing to supply the difference to the lender and buy the property.
This is because the investor is counting on being able to either hold onto that house until the market turns around or because they believe they can sell the house and make a profit.
However, if the owner was fortunate enough to be in a situation where they have paid the loan down to 80% of what the loan was (in other words, the 20% down payment was paid), there's a probability to renegotiate the loan with the lender.
The Homeowner's Protection Act of 1998 requires lenders to disclose the date when PMI could be dropped because the loan is now paid down to the 80% mark.
If this is the case, then the lender would be much more likely to agree to a short sale because then they would be losing money on a foreclosure.
Don't assume that because the loan hasn't been paid down enough that a short sale will be denied.
The key with any business transaction is communication.
Today, many buyers are looking to purchase a home through the short sale process and have concerns about how PMI will impact this sale.
Private mortgage insurance is a failsafe policy for the lender in case the buyer defaults on the loan.
If the homeowner happens to default on the mortgage, the lender will file for foreclosure and will also file a claim against the PMI to recoup up to 20% of the total mortgage for that real estate.
The problem with a short sale on a property with PMI is that often the lender can get more money from the foreclosure of the house than they would through a short sale.
Let's say a homeowner bought a house for $300,000, and wasn't able to come up with the 20% down payment.
Because the loan is for more than 80% of the home's cost, the lender required private mortgage insurance.
Unfortunately, times change and things happen.
Now the homeowner is 90 days behind in the mortgage.
If the lender forecloses on the house, that company could receive up to 80% of the mortgage which would be about $240,000 through PMI.
Now, if the owner were to try to save their credit (and maybe even their dignity) through a short sale, the lender could stand to lose more money.
Chances are the homeowner would have to sell the house at a much lower price than was originally paid and also lower than what is currently owed.
In most real estate investing markets around the country today, the home might bring in an offer between $200,000 and $220,000.
In a short sale, the lender has to pay the closing costs which are about 8%.
This means the lender would need to recoup about 92%.
However, in this scenario if you multiply $220,000 by 0.
92, you get $202,000.
This is the amount the lender would make from a short sale on the house.
In short, the lender would be agreeing to accept $18,000 less than they could get through PMI.
Sometimes you can find someone in real estate investing who would be willing to supply the difference to the lender and buy the property.
This is because the investor is counting on being able to either hold onto that house until the market turns around or because they believe they can sell the house and make a profit.
However, if the owner was fortunate enough to be in a situation where they have paid the loan down to 80% of what the loan was (in other words, the 20% down payment was paid), there's a probability to renegotiate the loan with the lender.
The Homeowner's Protection Act of 1998 requires lenders to disclose the date when PMI could be dropped because the loan is now paid down to the 80% mark.
If this is the case, then the lender would be much more likely to agree to a short sale because then they would be losing money on a foreclosure.
Don't assume that because the loan hasn't been paid down enough that a short sale will be denied.
The key with any business transaction is communication.
Source...