Short Sale Investing: Private Mortgage Insurance (PMI)
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The Truth Behind (PMI)
Short sale investors at all levels of experience tend to get thrown whenever they come across a deal with private mortgage insurance (PMI).
A quick review: PMI is insurance that lenders require from most homebuyers who obtain loans that are more than 80 percent of their new home’s value. In other words, buyers with less than a 20 percent down payment are normally required to pay PMI. Note that many people used a second loan (piggyback, Heloc, etc) as a way to avoid PMI.
Obviously, the purpose of PMI is to protect the lender in case the borrower defaults on a loan; however, PMI also provides greater access for home ownership for those who have less money for a down payment. With PMI, lenders are willing to take the risk on a buyer who can only put down 3 to 5 percent.
Once the principal is reduced to 80 percent of value, the PMI may no longer required – it all depends on the credit worthiness of the borrower.
I’ll hazard to guess that most of the loans you will work on have PMI, after all, who puts down 20 percent when buying a house these days?
If your case has PMI, the lender may or may not send the file to the PMI company for review. The bank will have preset approval ratios for the different PMI companies, similar to the approval ratios for FNMA and FDMC loans, and if the loss meets the requirements, the bank can approve the offer on their own. If for some reason the bank needs assistance from the PMI company, they will send them the file. The PMI company will then make an educated decision on what they will accept. Be aware that PMI does not have any preset guidelines for what they will accept. The approval depends upon the amount of the loss and the coverage ratio as well as the BPO value. (FMV value).
The coverage ratio is the percentage of the loss that PMI insures (in other words, it’s a percentage of the total debt). This percentage can vary widely. Just be aware that it’s out there and that PMI has the final say on short sales when PMI is on the loan.
Coverage ratios for PMI vary between 10-35 percent of the payoff value for the loan; in other words, the percentage is taken off the total debt, which you as the investor should know.
Example:
Payoffs = $218,000
Coverage Ratio = 20%
218,000 X 20% = $43,600
$218,000 - $43,600 = $174,400
$174,400 = The lowest net proceeds the bank can receive the get full reimbursement for the loss from PMI.
This means that on a loan with PMI and the coverage ratio is 20 percent they will cover $43,600 dollars when the payoff is $218,000.
Some additional information regarding PMI:
1) PMI follows the loan, even if the loan is refinanced or sold.
2) PMI companies may complete an independent BPO
3) Always have your negotiator ask if PMI exists on the loan and be sure to ask who the PMI company is and what’s the coverage ratio?
4) Investors may negotiate directly with the PMI company
The five major PMI companies are all publicly traded companies and are as follows:
1. MGIC aka Mortgage Guaranty Insurance Corporation
In many cases the servicers who are negotiating the short sales are receiving the final approval from PMI. So why not go directly to PMI to negotiate with them? In many cases the servicers are overwhelmed with files. They cannot handle the number of loans and files they currently have to resolve.
In these cases you can attempt to negotiate directly with the PMI company since they make the final decision anyway.
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Comments
Every Article including the Short Sale Manifesto are an excellent source of knowledge. I have gained some excellent tips and info from these very informative articles and presentations. Josh is brilliant and generous as he is providing great information free of charge.
Congratulations and keep up the good work, Josh.
Manny Pinto, MA
781-826-7733
A lot of the companies in your hub that sold mortgage insurance have either gone out of business or this in serious financial trouble. They failed to foresee the coming real estate bubble and got caught in the storm of falling home prices.
I have been told that PMI companies have garnished the wages of the mortgagor after the short sale was approved and the transaction settled. In one case the garnishment came thee years after the sale, and after they moved across the country and took new jobs. PMI companies can go after the mortgagor for the amount of the loss, and they do. The homeowner should be advised of this pitfall. Any comments or experience with a seller calling a year or two later wondering why they are in this new situation?
Great explenation - I write a lot of articles also - had a big one on what I felt was the Mortgage Insurance - scam - but you do a good job of explaining it -
Aloha
Lance Owens
A short sale in real estate is not always a pleasant transaction.
There are many ways to lose a home but signing away ownership in a manner that destroys credit, embarrasses the family and strips an owner of dignity is one of the hardest. For owners who can no longer afford to keep mortgage payments current, there are alternatives to bankruptcy or foreclosure proceedings. One of those options is called a "short sale."
Although all lenders have varying requirements and may demand that a borrower submit a wide array of documentation, the following steps will give you a pretty good idea of what to expect.
Call the LenderYou may need to make a half dozen phone calls before you find the person responsible for handling short sales. You do not want to talk to the "real estate short sale" or "work out" department; you want the supervisor's name, the name of the individual capable of making a decision.
Submit Letter of AuthorizationLenders typically do not want to disclose any of your personal information without written authorization to do so. If you are working with a real estate agent, closing agent, title company or lawyer, you will receive better cooperation if you write a letter to the lender giving the lender permission to talk with those specific interested parties about your loan. The letter should include the following:
· Property Address
· Loan Reference Number
· Your Name
· The Date
· Your Agent's Name & Contact Information
Preliminary Net SheetThis is an estimated closing statement that shows the sales price you expect to receive and all the costs of sale, unpaid loan balances, outstanding payments due and late fees, including real estate commissions, if any. Your closing agent or lawyer should be able to prepare this for you, if you do not know how to calculate any of these fees. If the bottom line shows cash to the seller, you will probably not need a short sale.
Hardship LetterThe sadder, the better. This statement of facts describes how you got into this financial bind and makes a plea to the lender to accept less than full payment. Lenders are not inhumane and can understand if you lost your job, were hospitalized or a truck ran over your entire family, but lenders are not particularly empathetic to situations involving dishonesty or criminal behavior.
Proof of Income and AssetsIt is best to be truthful and honest about your financial situation and disclose assets. Lenders will want to know if you have savings accounts, money market accounts, stocks or bonds, negotiable instruments, cash or other real estate or anything of tangible value. Lenders are not in the charity business and often require assurance that the debtor cannot pay back any of the debt that it is forgiving.
Copies of Bank StatementsIf your bank statements reflect unaccountable deposits, large cash withdrawals or an unusual number of checks, it's probably a good idea to explain each of those line items to the lender. In addition, the lender might want you to account for each and every deposit so it can determine whether deposits will continue.
Comparative Market AnalysisSometimes markets decline and property values fall. If this is part of the reason that you cannot sell your home for enough to pay off the lender, this fact should be substantiated for the lender through a comparative market analysis (CMA). Your real estate agent can prepare a CMA for you, which will show prices of similar homes:
· Active on the market
· Pending sales
· Solds from the past six months.
Purchase Agreement & Listing Agreement
when you reach an agreement to sell with a prospective purchaser, the lender will want a copy of the offer, along with a copy of your listing agreement. Be prepared for the lender to renegotiate commissions and to refuse to pay for certain items such as home protection plans or termite inspections.
Comment on the preceding comment. Publish your article on your own place.
Otherwise, I appreciate the information on PMI. I never thought about negotiating with the insurer.
Josh, I love your pictures and great article. Visit me back and let's keep in touch here. Have a nice day!
Great hub, good work, thank you for the sharing!
When can you can private mortgage insurance?
Me and my husband bought a home a year ago and had to pay PMI because we didn't have a down payment. I heard you can cancel it but didn't find out when?
nancydodds1 says:
12 months ago
Excellent explanation about mortgage insurance. I had gone through your hub. And you can get some suggestions from mortgage calculator go through it.