There’s a common misconception that private mortgage insurance (PMI) is meant to protect the homeowner if a loan becomes delinquent. This seems logical since you’re the one paying the monthly fee. The reality, however, is that PMI is meant to protect the lender from incurring losses in a short sale or foreclosure. Although PMI isn’t meant to bail you out of a bad situation, having it can still work to your benefit. The private insurer may cover the deficiency from short selling your home, potentially setting you free and clear of owing a continued debt to your lender after the sale. It is, however, possible that the PMI will pursue legal action on the homeowner to recover either a portion or the entirety of what they pay out to the mortgage lender.

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In a perfect situation, you’ll complete the short sale for less than you owe on the home and avoid paying a deficiency. When the sale is complete, the lender could forgive your loan deficiency and get reimbursed by the PMI insurer. Having to pay less to the lender than they would have if the home was foreclosed on, the PMI insurer may be satisfied enough and leave it at that. PMI insurers can often complicate the process though. They have the ability to either completely reject the short sale or to renegotiate the terms. They may insist that the homeowner raises the selling price in the short sale or that they make a seller contribution. They may even allow the short sale to be completed, but then gain the rights to seek the deficiency from the lender and pursue their losses from the seller after the fact.

For example, let’s say that you owe a total of $200,000 on your mortgage obligation. You intend to short sell the home to a buyer for $160,000, leaving a deficiency of $40,000. The lender may approve the short sale and recoup their $40,000 loss from the PMI insurer. The PMI insurer then has the ability to secure the rights to that deficiency judgement from the lender.

The deficiency judgement is essentially the right to sue the homeowner for the $40,000 deficiency that the short sale created. They may, alternatively, request that the home is instead sold for a minimum of $180,000 dollars, or that the seller make a contribution of $10,000 to them as ways to reduce their losses before they’re willing to approve the sale. It’s all a negotiation, which is why it’s critical that you get an experienced and qualified real estate professional to negotiate with the lenders and insurers on your behalf. Our negotiations are focused on you walking away without the potential of being sued down the road during this already difficult time.

Although not all states permit a lender to get a deficiency judgement, Ohio does allow it. To avoid paying a deficiency, it must be explicitly stated in the terms of the short sale that the lender is waiving their right to pursue it. Neglecting to get that agreement in writing gives the lender or the PMI insurer the ability to seek it through a lawsuit after the short sale is completed.

It is of utmost importance that you choose to work with an experienced real estate agent that understands short sales and will ensure that your lender agrees to waive its right to the deficiency and will never pursue you for the difference.

In summary, if you have PMI on your mortgage, the process is longer and requires an extra step that can be very time consuming. The PMI insurer can:

  • Ask for a financial contribution from the borrower in order to allow a short sale. We negotiate for no financial contribution and demonstrate to the lender that you cannot contribute any funds due to finances.
  • Not ask for any contributions and clear the short sale.
  • Not allow a short sale at all.

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Request a Free, No Obligation, Confidential Consultation.

Please fill out the form below and we will contact you shortly or alternatively call us at (216) 270-7488

Additional Resources

We have put together a comprehensive list of resources going over the process, short sale nuances as well as a very thorough list of Frequently Asked Questions that goes over most questions you may have about short sales.

A quick guide explaining what the short sale process is, qualifications for a short sale, your responsibilities as a seller, necessary financial paperwork and the lender’s process.

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A comprehensive Frequently Asked Questions guide summarizing the basics as well as in-depth short sale questions. If you are limited on time, this would be the resource to read.

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An effective Hardship Letter is so important that we put together a separate resource focusing on composing an effective letter that will increase your odds of getting your sale approved.

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If you have more then one loan on your home such as a home equity line of credit or another type of credit, the short sale process gets more complex. Find out the details on what can be done here.

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If your home loan has Private Mortgage Insurance, or PMI (it is usually part of o your monthly payment), getting your short sale approved may be more challenging. Read more here.

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While every short sale is different, sometimes short sales fail. Find out the most common reasons a short sale can be unsuccessful as well as what, if anything, can be done in each scenario.

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