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Private Mortgage Insurance and the Short Sale Investor

January 30th, 2009 · 118 Comments · Foreclosure Tips, Negotiating Tips, Short Sale Tips

Recently I was working with a client who was facing foreclosure. They had been working with their lender on performing a loan modification. According to the bank representative, their income ratios were not sufficient to do the modification.

Therefore, our focus was to stop the pending foreclosure by conducting a short sale. I asked the homeowner how many loans she had on the property and she responded, one. Next I asked if this was basically a 100% first-only loan, and she replied yes. The next question was critical–Do you have PMI on this loan?

This homeowner, like most I work with, did not readily know the answer to my question. I told her to call her lender and ask. Sure enough, their single loan had PMI. I responded: Unfortunately, I think a short sale on this property is unlikely (keep in mind, I have closed over 100 deals).

Let me explain…

This property was purchased at the peak of our real estate market in 2006, for about $300,000. Also, remember there is one loan of about $300,000. PMI normally insures for up to 80 percent of the loan amount. (It is the 80/20 financing that was brought about to eliminate the need for the PMI.)

This means that the lender can collect about $240,000 (300,000 * 0.80) if the property is foreclosed. In our short sale scenario, I was guessing a offer would come in at around $200,000-$220,000, given our buyers’ market in Denver. Plus, the lender normally has to cover all of the short sale closing costs, say another 8 percent. So with our theoretical short sale, the lender would be looking to net about $202,000 ($220,000 * 0.92). Our offer could quite easily be lower, since the property’s area is flooded with foreclosures.

Obviously the lender will be inclined to take the PMI offer of $240,000, versus our theoretical offer of $202,000.

I have been down this dusty old road a few times (all the way to the non-deal), and I choose not to work them.

Check out my video follow-on to this blog

Tom Farwell

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