Private Mortgage Insurance (PMI) and the Raleigh Short Sale

PMI is known as the acronym for private mortgage insurance. Private Mortgage Insurance is used when a borrower has less than 20% for a down payment. Private mortgage insurance protects mortgage lenders against potential losses in the event of borrower default. The insurance company, collects a monthly premium from the borrower (based on risk analysis) and agrees to pay the lender a certain amount of money if the loan defaults (usually 17-25% of the loan amount). It's model was based on FHA loans and their mortgage insurance premium (called MIP, probably to confuse you). FHA and VA offer guarantees to the lender equal to as much as 25% of the mortgage balance.

If a borrower defaults on his conventional mortgage (goes 90 days late on a payment), the lender files the state-specific foreclosure notice and sends in a claim to the insurance company to recover as much as 20% of the mortgage balance. This, in turn, gives the lender a smaller risk when the lender sells the property to recover their losses.

Let's assume we have a $300,000 loan for a property that was purchased last year for $317,000. It may be selling for as little as $260,000 today. Assume it costs about 9% to sell the property. You should know two things:

How much will the lender receive from the insurance company if the borrower defaults?

$300,000 times .20= $60,000

What price must the lender sell for to not have a loss?

Well, the lender's exposure has been limited to $240,000 now that they received $60,000 from the mortgage insurance company. We take $240,000 divided by 91% (remember that it costs 9% to sell so the 91% represents the net proceeds). $240,000/.91= $263,736.

Why is this so important to Realtors in Raleigh? When negotiating an offer for a property that would result in a short payoff to a lender, you need to remember this fact: PMI claims will mitigate some of that loss. If you know that a seller has PMI on their mortgage, you have that much more wiggle room when negotiating a short sale with the lender. Lenders have been known to attack a Raleigh Realtors commissions as much as 50% when a Charlotte short sale exists.

Knowing your numbers and how PMI affects a lender will help you defend your commission. If you understand the net effect the sale will have on a lender, your short sales will go much more smoothly.

Rodney McNabb is a part of a team of Raleigh Realtors that offer services in Raleigh Property Management and Raleigh Short Sales