The definition of Mortgage Insurance
In a nutshell, mortgage insurance is an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan. Mortgage insurance (MI) is required for mortgage loans which exceed 80% of the property’s sale price.
This means that if you are buying a home with less than 20% down, you are obligated to pay for mortgage insurance. The mortgage insurer will charge a premium for this coverage, which may be paid by either the borrower or the lender. If the borrower defaults and the property is sold at a loss, The MI company will pay out the amount as described in the policy. Coverages offered by mortgage insurers can vary from 20% to 50% and higher.
How does mortgage insurance affect an Orlando short sale?
If you’re trying to complete a short sale on your property and there’s a mortgage insurance in place then there are some things that you need to be aware of. The decision long longer falls only on the lender, it will also have to be approved the the mortgage insurance company as well. As a mater of fact the MI company is usually the one in charge of the situation.
Typically what happens, especially in regards to 2nd liens, is that the MI company will want a higher payoff than would be the case if the loan did not have MI. This can definitely complicate things because if the 2nd mortgage holder wants a higher pay off than the 1st mortgage holder is willing to pay then the deal can easily fall apart.
The MI company can refuse the short sale offer and kill the deal even if the lender approves it. Although our office has closed countless short sales that have had MI insurance, I can tell you that there’s a lot more work involved. It’s actually just like dealing with another lien holder.
There are 2 different types of mortgage insurance, one is paid for by the borrower and the other is paid for by the lender.
Borrower-Paid Private Mortgage Insurance (BPMI) – This is default insurance on mortgage loans paid for by borrowers. BPMI allows borrowers to obtain a mortgage without having to provide 20% down payment, by covering the lender for the added risk of a high loan-to-value mortgage.
Lender-paid private mortgage insurance (LPMI)–LPMI is similar to BPMI except that it is paid for by the lender, and the borrower is often unaware of its existence unless the homeowner tries to do a short sale. The cost of the premium is built into the interest rate charged on the loan. The lender will go ahead and insure themselves if they feel it benefits them.
