Guest blogger Marie Nelson explains some of the fine points of a short sale.
Private Mortgage Insurance: What is it and What is its Use During Short Sale?
In the wake of the growing financial crisis, foreclosures are now being almost considered the order of the day. However, selling your own home might as well be one of the ways to combat these kinds of problems. In this case, having to sell the house at a price below the outstanding mortgage might be the only option available to you. Selling a house or for that matter a property for an amount that is below the outstanding mortgage is often referred to as short sale. PMI or private mortgage insurance is something that is required to protect lenders against short sale. It doesn’t provide any kind of protection to the borrowers though.
As you go through the features of PMI, it will be easier for you to understand why it is availed by borrowers though they aren’t protected by it.
This is a type of insurance that pays off the mortgage in the event of your death. Even if you stop paying the mortgage in the middle, PMI ensures that your lender remains insured. That’s why lenders insist borrowers on paying for private mortgage insurance.
The lender generally requires the borrower to opt for it, when the borrower pays a very little percentage of the sales price as the down payment. Actually, to explain it in a further detailed manner, the risk of the lender increases with the borrower paying up lower upfront fees. The amount of down payment helps to establish the borrower’s credentials or for that matter his ability to repay the loan in a major way. That’s why lenders insist borrowers on securing this insurance cover.
It is generally required by lenders when borrowers pay less than 20 per cent of the total sales price as down payment.
The borrower generally doesn’t have the liberty to choose the premiums or else the insurer in this case.
Though it is traditionally claimed that the cover doesn’t protect borrowers in any way it should be noted that it covers deficiencies that are a result of the short sales, thereby proving to be a kind of relief for mortgage borrowers as well.
Generally maximum loan companies don’t set fixed percentages of the losses to be accepted by them. They either approve or disapprove a short sale, keeping a number of factors in view including the overall value of the concerned property, the seller’s circumstances and the total loan amount. Therefore the entire decision varies on a loan to loan basis.
PMI during Short Sale- Does it Help?
Ideally as it is meant to make up for the loan deficiency arising out of short sale, it might as well be taken for granted that the mortgage lenders will forgive short sale deficiencies and claim the deficient money from the PMI insurer. But the scenario might often turn out complicated with the PMI insurer being involved. However, mostly there are chances of subrogation whereby the PMI insurer will be allowed to recover the short sale deficiency from you after paying it to your lender.
Marie has keen interest in writing about different types of insurance covers like family income benefit cover, relevant life insurance and also investment in various types of annuities.