The subtlety of dealing with short sales where mortgage insurance is in play is among the reasons why we recommend that investors and agents use an experienced, professional negotiating service.
Mortgage insurance is a policy held by a lender or noteholder to pay off a loan in case of default. This may be added to the loan amount paid by the mortgagor, or it may be a separate policy paid by the noteholder. It may cover a portion of the loan or pay up to 100%. There may be multiple insurance holders if a HELOC or second mortgage is involved.
Private mortgage insurance is paid by the mortgagor as part of escrow and is generally required when the mortgage exceeds 80% of LTV. When the home is purchased as an investment the private insurance will probably be required to be paid with the loan until the mortgage value is 70% or less. The PMI policy will dictate how much of the mortgage is covered and at what point the payments will cease being made by the mortgagor, but commonly the insurance company must stop charging the Homeowner once the loan gets to 78% of LTV.
The insurance company will review any request for a short sale just as rigorously as the lender or servicer. While it isn’t advisable to send the mortgage insurance company a copy of the hardship package initially-that will generally be taken care of by the lender or servicer-understand that the review by the mortgage insurance company will lengthen the time required to process a short sale. It is one more representative who needs to be convinced that the hardship is legitimate and that the short sale offer is fair. They are directly looking after the interests of the investor who is the note holder and as such will want to be sure that the investor is getting the best offer possible.
Typically, the mortgage insurance company will ask for deficiency, if the mortgagor has the income or assets to pay it, or they will at least ask for the Homeowner to come to the closing table with some skin in the game.
The insurance information is not always readily apparent in the documentation that the Homeowner has. The lender should reveal the mortgage insurance information and provide a copy of the policy if requested.
The fact that there is mortgage insurance can work either way in terms of the likelihood that a short sale will be approved. Just like some lenders and servicers, some companies are easier to deal with and some are less willing to approve a short sale. They don’t have as much incentive to settle with the Homeowner as a lender who must clear out dead weight loans in order to continue lending to others. Lenders, on the other hand, may well find it more attractive to settle a short sale and get compensated through the mortgage insurance rather than to wait to sell a home in foreclosure.
It can work the other way around as well. If a lender or servicer is uncooperative sometimes it is possible to use the mortgage insurance company as an ally if it is clear that a short sale is going to net the Noteholder who is insured more money by taking the deal rather than letting the house go into foreclosure.