The Problem of PMI & Charlottesville Short Sales
The Problem of PMI & Charlottesville Short Sales
A lot of Charlottesville short sale investors become very confused as soon as PMI is mentioned.
PMI or Private Mortgage Insurance is that monthly fee many Charlottesville homeowners pay each and every month for what appears like no apparent reason (in their opinion).
Of course, there was a reason for it and if you are contemplating a short sale deal, this reasoning is a valid concern.
PMI was created for the express purpose of insuring against default by home buyers that didn't put at least 20 percent down when purchasing a home.
It does not mean life insurance in case one of the bread winners is killed in an accident. That's a totally separate insurance product.
The idea was simple enough; Charlottesville real estate rarely ever falls and when it does, it rarely falls by much more than 20 percent.
Because the majority of mortgages are amortized, the closing costs and larger up-front payments effectively reduce the risk even more.
To compensate for the difference between anticipated losses and the actual loss of any profit (after taking amortization etc into account) most Charlottesville homeowners would be forced to pay for PMI until the loan to debt ratio fell below 80 percent.
Sounds like a good plan of protection so what could be the problem when it comes to a Charlottesville short sale?
Well, the thought process is like this...if the PMI or private mortgage insurance will cough up a higher cost in the event of a default than the short sale offer, then it's less likely the lender will want to negotiate below a given amount.
However, this isn't always the situation.
In some instances the primary mortgage holder will accept a short sale offer if there is a second mortgage or promise of future payment - a controversial but relatively common situation since legally the current homeowner is responsible for any gap.
Of course, faced with the prospect of losing their home and still owing money, most Charlottesville homeowners tend to either walk away entirely or simply file for bankruptcy protection.
Because of the drama associated with PMI and short sales, many investors simply opt to avoid them altogether.
Before making that decision it's important to clear up a few myths surrounding PMI and short sales...
1. PMI pays up to 20 percent...not 80 percent.
The private mortgage insurance was put into place because the original Charlottesville owner didn't put at least 20 percent down...it's the difference between 100 percent financing and 80 percent (or whatever amount above 80 percent financing obtained for the original loan).
2. Transactions costs, maintenance fees and other expenses must also be taken into account.
3. AIG United Guaranty is one of the larger entities holding many of these issues. As you know (or should know), AIG is facing just a few problems of their own to the point that some mortgage companies no longer want to negotiate directly with the PMI during the course of a short sale.
So, the bottom line is this; when making an offer for Charlottesville short sales on any property be sure to find out for sure (don't leave it to the homeowner to know or understand if they pay PMI) if the property is impacted by PMI.
If so, realize that some of the loss will be mitigated by the PMI and plan your calculations accordingly.
Should you decide to continue the negotiation process, be sure you fully understand the additional level of complexity added by the existence of PMI into the equation.
Rob Alley, Realtor at Keller Williams Charlottesville
540-250-3275 (cell)
roballeyrealtor@gmail.com
http://www.robsellscharlottesville.com
http://www.forestlakesliving.com
http://www.charlottesvillevarealestate.blogspot.com
http://www.charlottesvilleshortsale.com
http://www.theaverygroup.com
A lot of Charlottesville short sale investors become very confused as soon as PMI is mentioned.
PMI or Private Mortgage Insurance is that monthly fee many Charlottesville homeowners pay each and every month for what appears like no apparent reason (in their opinion).
Of course, there was a reason for it and if you are contemplating a short sale deal, this reasoning is a valid concern.
PMI was created for the express purpose of insuring against default by home buyers that didn't put at least 20 percent down when purchasing a home.
It does not mean life insurance in case one of the bread winners is killed in an accident. That's a totally separate insurance product.
The idea was simple enough; Charlottesville real estate rarely ever falls and when it does, it rarely falls by much more than 20 percent.
Because the majority of mortgages are amortized, the closing costs and larger up-front payments effectively reduce the risk even more.
To compensate for the difference between anticipated losses and the actual loss of any profit (after taking amortization etc into account) most Charlottesville homeowners would be forced to pay for PMI until the loan to debt ratio fell below 80 percent.
Sounds like a good plan of protection so what could be the problem when it comes to a Charlottesville short sale?
Well, the thought process is like this...if the PMI or private mortgage insurance will cough up a higher cost in the event of a default than the short sale offer, then it's less likely the lender will want to negotiate below a given amount.
However, this isn't always the situation.
In some instances the primary mortgage holder will accept a short sale offer if there is a second mortgage or promise of future payment - a controversial but relatively common situation since legally the current homeowner is responsible for any gap.
Of course, faced with the prospect of losing their home and still owing money, most Charlottesville homeowners tend to either walk away entirely or simply file for bankruptcy protection.
Because of the drama associated with PMI and short sales, many investors simply opt to avoid them altogether.
Before making that decision it's important to clear up a few myths surrounding PMI and short sales...
1. PMI pays up to 20 percent...not 80 percent.
The private mortgage insurance was put into place because the original Charlottesville owner didn't put at least 20 percent down...it's the difference between 100 percent financing and 80 percent (or whatever amount above 80 percent financing obtained for the original loan).
2. Transactions costs, maintenance fees and other expenses must also be taken into account.
3. AIG United Guaranty is one of the larger entities holding many of these issues. As you know (or should know), AIG is facing just a few problems of their own to the point that some mortgage companies no longer want to negotiate directly with the PMI during the course of a short sale.
So, the bottom line is this; when making an offer for Charlottesville short sales on any property be sure to find out for sure (don't leave it to the homeowner to know or understand if they pay PMI) if the property is impacted by PMI.
If so, realize that some of the loss will be mitigated by the PMI and plan your calculations accordingly.
Should you decide to continue the negotiation process, be sure you fully understand the additional level of complexity added by the existence of PMI into the equation.
Rob Alley, Realtor at Keller Williams Charlottesville
540-250-3275 (cell)
roballeyrealtor@gmail.com
http://www.robsellscharlottesville.com
http://www.forestlakesliving.com
http://www.charlottesvillevarealestate.blogspot.com
http://www.charlottesvilleshortsale.com
http://www.theaverygroup.com
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