When you bought your home, your mortgage lender may have required private mortgage insurance on your loan. PMI is insurance against your default on your home loan, with the lender as the beneficiary. A borrower who puts down less than 20 percent of the home's value usually must have PMI. If you have PMI on your loan and are facing foreclosure, the insurance may limit some of your help options.
Lenders require PMI to protect against loss from borrower default. If you can't pay your loan and the home is foreclosed on, the lender submits a claim to the PMI insurer. The insurer pays the lender the amount set by the PMI agreement, which usually covers the lender's loss after the foreclosed home is sold and other costs the lender paid before the foreclosure, such as property taxes. Under federal law, PMI should be cancelled at the borrower's request once the loan balance reaches 80 percent of the home's value at the time of purchase as long as the borrower is current and has a good payment history.
A loan modification can help save a borrower facing foreclosure by lowering payments and changing the loan's terms. If you're dealing with foreclosure, you might be able to save your home under the Home Affordable Modification Program, a federal assistance program for struggling homeowners, or through a modification program offered by your lender. Whether PMI hurts your chances of modification depends on the modification type and the lender's policies. If the lender evaluates private modifications on a case-by-case basis, for example, having to recalculate PMI for the new loan terms might be considered an obstacle.
You may avoid foreclosure by selling your home in a short sale. As long as your lender and the PMI insurer approve, you can sell your home for a price that's less than your loan balance. PMI might harm your chances of getting your lender's approval. If your home's value has dropped since you bought it and you owe a substantial amount on your loan, the lender may get more money back on a PMI claim after foreclosure than from your short sale. The PMI insurer may not agree to the short sale or ask you for additional money in the form of an unsecured promissory note in return for approval.
PMI should not affect other services offered to you if you're in foreclosure, such as foreclosure counseling. Some PMI insurers offer help to borrowers in foreclosure who have a mortgage insured by their company. A PMI insurance company benefits when a borrower avoids foreclosure because the company doesn't have to pay a claim. The insurer's loss mitigation department may work with you and your lender to prevent a foreclosure.
- Miss Short Sale Expert: Private Mortgage Insurance and the Short Sale Investor
- Federal Reserve Board: Homeowners Protection Act
- Making Home Affordable.gov: Home Affordable Modification Program
- Sniper Real Estate: Short Sale Promissory Note
- PMI Mortgage Insurance Co: Home Preservation Program
- Federal Reserve Bank of San Francisco: PMI