Q: My son and his wife are interesting in purchasing a foreclosure property as their primary residence.
They’re looking for a townhouse since they can’;t afford to pay the full cost for a single family home.
Can you tell us what percentage of the foreclosed loan the former owner’s private mortgage insurance? When will that be paid and to whom is it paid? Can my son and his wife expect a significant reduction in the sale price of a foreclosed home if the private mortgage insurance kicked in?
Thank you for any related information.
A: Private mortgage insurance (PMI) covers the portion of the mortgage that exceeds 80 percent of the sales price of the home.
For example, if a home buyer gets a mortgage for 90 percent of the sales price of a home (or for 90 percent of the appraised value of the home if the owner is refinancing), PMI would cover the top 10 percent of the loan. The final 10 percent would be covered by the cash down payment. If the first mortgage is for 100 percent of the sales price of the property, PMI would cover the lender against defaults of the top 20 percent of the mortgage.
How does this play out in practice? Right now, all of the companies that sell private mortgage insurance are reporting enormous losses from 2007, due to short sales and foreclosures. Most of these publicly-traded companies are reporting their first losses ever.
When someone sells a home for less than the mortgage amount, PMI kicks in and reimburses the lender for the portion of the mortgage that was covered by the loan. So if the mortgage lender agrees to accept a short sale for $10,000 less than the mortgage amount, and the loan had PMI, the PMI company would write a check for $10,000 (or a portion of that amount) to the lender, making the lender whole.
But I’ve been unable to find a way to figure out exactly how much the lender is reimbursed by the private mortgage insurer. The good news is that information isn’t relevant when making an offer for an REO property. (REO is industry jargon that stands for “real estate owned,” which means the lender has foreclosed on the property and is the current owner.)
The discount you’re going to get from a lender on a piece of REO property depends on a combination of how much the local real estate market has tanked, how desperate the lender is to unload the property, and how much other homes are selling for in the neighborhood.
You may get a substantial discount, but it won’t have anything to do with how much the lender has been paid by the company who underwrote the private mortgage insurance policy.
Your attorney and real estate agent should be able to help you further. For information on how to identify and purchase foreclosures, check out real estate agent Ralph Roberts’ book “Foreclosure Investing for Dummies.” Roberts, who tells me he has personally purchased more than 2,000 foreclosures, does a nice job of explaining how to identify an appropriate foreclosure, negotiate for it, find the financing for it, and close on it.