What is Mortgage Insurance?
Mortgage insurance is a financial guaranty for the lender that will help to reduce or eliminate a loss in case the borrower defaults on their mortgage. MI is almost universally required on loans where there is less than twenty percent equity. That means if you are purchasing a home with less than twenty percent down or refinancing to more than eighty percent of your homes value, you are going to be required to pay mortgage insurance. To be put simply, mortgage insurance spreads the risk between the lender and the insurance company.
The Two types of Private Mortgage Insurance
Borrower-Paid Private Mortgage Insurance (BPMI) – This is default insurance on mortgage loans paid for by borrowers.
Lender-paid private mortgage insurance – This is similar to BPMI except it is paid for by the lender. The lender will go ahead and insure themselves if they feel it behooves them.
How can this affect a short sale transaction?
When processing a short sale with one of the loans having Mortgage Insurance the file will have to be reviewed by not only the investor/beneficiary, but by the Mortgage Insurance Company for approval as well. They must both approve the transaction in order to proceed. In these situations the MI Company is usually the one who is calling the shots. The servicers following the MI Company’s guidelines may request a higher NET. In regards to a 2nd lien that is insured you would typically see a request for a larger release than if it was the same case without MI/PMI on the loan. This is why dealing with MI often causes complications. For example the 2nd with MI may request a higher release than the 1st is willing to give. When contributions come into the picture often transactions have the potential to get more complicated. Depending on the state a promissory note may be an option. When the lender servicing a loan with MI is going to potentially kill the transaction due to requesting too high of a release we often go to the MI company and plead our case. At times the MI Company can have the servicer issue an approval if they come to a new mutual agreement regarding the NET/Claim. It’s important to know that having MI on one of your transactions is not always a red flag as sometimes they get done smoothly, but they can be a cause for concern.