Due to the decline of property values during and after the rescission, a large number of homeowners are going for short sale in order to get rid of their mortgages. In a short sale, the lender sells off the property at a price which is lower than the outstanding mortgage balance of the borrower. Thus, there results a deficiency amount from the sale of the property. This deficient amount needs to paid off by the ex-homeowner.
The short sale process seems easy but issues get complicated when a borrower goes for a private mortgage insurance (PMI) as he or she is unable to pay a down payment of 20%. The lender will contact the PMI Company in order to recover the deficient amount that results from the sale of the property.
What happens when lender sends the loan file to the PMI company?
The bank will send your file to the PMI company who will decide what they would accept. The PMI company does not have a guideline for what they would accept. The approval for the short sale depends upon the amount of the loss, the coverage ratio and the fair market value (FMV). The coverage ratio is the percentage of the loss that the PMI insures. It is actually a percentage of the total debt. This percentage can vary widely from one company to another.
What role does a promissory note play in a short sale?
In the recent times, the PMI companies, along with the lenders, have started asking the borrowers to sign a promissory note in regards to the deficient amount. This frustrates both the borrowers as well as their agents. If the borrower agrees to sign the promissory note, the he/she will have to pay back the amount that they receive from the PMI company. This will reduce the losses of the PMI company.
What happens when a borrower refuses to sign promissory note?
Many a times, when the borrower refuses to sign the promissory note, the PMI company refuses to approve the short sale thereby forcing the lender to foreclose the property. If the lender forecloses the property, it will take a long period of time for him to complete the whole process. Thus, the PMI company will be able to put off the payment of claims to the lender for 12-24 months. But again, if the market improves, the lender will make a lower claim which will be a profit for the PMI company.