Wednesday, October 21, 2015

The Consequences of Foreclosure


PMI is private mortgage insurance that protects the mortgage lender against default. PMI allows people to purchase a home by putting less money down usually 3-5% of the purchase price versus the standard 20% down payment. In some instances, the value of the home exceeds 80% of the outstanding loan and a lender will cancel the PMI depending on the policy and homeowner payment history. The homeowner makes monthly payments and the lender files a claim and receives the payout when a default occurs.

A portion of PMI is charged upfront at closing and is typically 1.75% of the sales price. The remaining fee is charged monthly as part of the mortgage payment (PMI + principal + interest + taxes) until the value of the home exceeds 80% of the outstanding loan balance. For most homeowners this is usually the life of the loan.  Most PMI premiums remain the same for the first 10 years of the loan and then reduce to a lower amount.

Steps to submit a claim
  1. Notify your PMI company once two mortgage payments have been missed, or when you file a foreclosure or a short sale has begun. The claim should be filed within 60 days of the transfer of title.
  2. Your PMI company will confirm and verify your coverage is active and request the necessary documents to process the claim within 20 days of receipt.
  3. Upon receipt of all required documents, the PMI company will review and finalize the claim.
  4. Claim payments are usually scheduled within 60 - 70 days from the date the claim and documentation received and payments are paid to the lender.
  5. A PMI claim pays 10-35% of the loan payoff amount at the time the loss is incurred to the lender. 

Lender process
  1. A lender can agree to accept a settlement sale on a property instead of a foreclosure and still has the option to file a claim with the PMI company for the property held in escrow. 
  2. When a home goes into foreclosure, a lender can submit a PMI claim to pay the cost of processing the foreclosure and for any other associated costs. However, the PMI company does not have to pay a claim until there is a foreclosure. 

Short sale
1.      If you decide to do a short sale, you must submit paperwork to your lender who submits it to the PMI company and requests that the PMI claim be paid prior to foreclosure.
2.      The PMI company does not have to pay the claim to the lender right away and can wait to see if the property goes to foreclosure.
3.      The PMI company may agree to pay the claim early but this usually requires the borrower to pay some money. 
4.      You are required to pay back the lender the amount you borrowed minus the principalPrincipal is the amount of money you borrow if you're getting a home loan. If you're buying a bond, the principal is the amount you're lending. Typically, you'll buy bonds with a face value of ,000. If you buy a ,000 bond, your principal is ,000. you paid off at that time plus any additional fees and costs that you might owe the lender as a result of defaulting on the loan. This is explained in detail in your mortgage loan.
5.      When a property is listed as a short sale, all submitted offers must be presented to the lender.
6.      The lender has the option to allow the PMI company to review the offer and accept or decline it. This process usually takes 30 to 60 days. However, the bank will review the figures on the offer to ensure that it can claim the maximum amount of PMI from the escrow account with all submitted offers, and will reserve the right to counter an offer. 
7.      If a short sale has remained on the market for over 6 months, the lender has the option to proceed with a foreclosure.
8.      The lender can sell the property to a private investor, sell the property at auction or keep the property and list the foreclosure sale with a real estate firm and once finalized the homeowner will be evicted.
9.      If the PMI company determines that the borrower has assets or income to pay the loss the PMI company may file a lawsuit or threaten legal action if payment is not received.  If this occurs, contact a real estate lawyer.
10.   Unfortunately, the homeowner is not eligible for compensation if any profit is made off the sale of the home.

The homeowner does not have to pay any monies to the lender
1.      When the lender and borrower no longer have to repay the full amount,
2.      When the borrower files bankruptcy and all or part of the loan debt is released or in some states where the lender can only go after the property and can’t go after the borrower for a deficiency judgment,
3.      If you had not been able to repay the loan and the lender had foreclosed,
4.      If you had sold the home as a short sale and the lender agreed to accept that amount as full payment for the debt and agreed not to go after you for the shortage, or
5.      The lender would not be able to ask you for additional money.

If you do not meet any of these conditions, you may have to pay back some money to the lender.

For example, on a $100,000.00 loan with 20% PMI when the borrower defaults and the lender takes the property back through foreclosure, the lender will sell the property.  If the net proceeds do not cover the entire loan plus fees, say a net of $80,000.00, the lender would file a claim with the PMI company for the 20% that they lost.

Check with a lawyer and CPA to find out your rights and liability when filing a foreclosure or doing a short sale.

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