As the value of real estate plummets, many real estate professionals, homeowners and lenders must familiarize themselves with the concept known as the short sale. This workout solution is prevalent in the real estate advertisements and multiple listing services.
Those who are fellow soldiers in this battle understand that it is exactly that: a battle.
The battle to get a short sale, sometimes called short payoff, approved by the lender or lenders has become even more difficult of late. The short sale offer, costs associated with closing and the nominal payment to a second mortgage holder must all be approved by the first mortgage holder.
If there is a second mortgage, the second mortgage holder must agree to a nominal payment at closing for release of its lien. In this situation the second mortgage holder may require a borrower to sign an unsecured promissory note as a prerequisite to agreeing to the short sale. However, the approval process is made even more tenuous if there is private mortgage insurance.
If so, the private mortgage insurer gets to weigh in as well and has the final say on approval.
Private mortgage insurance, also referred to as PMI, is required by some lenders when someone is borrowing over 80 percent of the total value of the property. PMI insures the lender against a default by the borrower, but also enables many potential homebuyers without a 20 percent down payment to obtain a loan to purchase a home. If there is mortgage insurance, the mortgage holder may or may not need to consult the insurer for final approval. Sometimes the lender will have preset approval ratios for the different PMI companies and if the loss meets the requirements, the lender can approve the offer on its own. Borrower beware, however. You may get an approval from the bank that states it approves the short sale followed by this language:
If the loan is covered by mortgage insurance, the mortgage insurance company may reserve the right to pursue the seller/borrower for the deficiency based on the terms of the mortgage insurance policy.
If for some reason the lender needs assistance from the PMI company, the lender will send them the file.
The PMI company will then make an “educated” decision on what it will accept. This is the difficult part because the method the insurer uses in assessing the offer is not entirely clear.
Be aware that PMI companies do not have any preset guidelines for what they will accept. The approval depends upon the amount of the loss and the coverage ratio as well as fair market value of the property.
The coverage ratio is the percentage of the loss that PMI insures. This percentage can vary widely. Make sure to confirm with the bank’s short sale negotiator whether or not mortgage insurance exists when submitting a short sale offer for approval.
Cynthia A. Riddell, is an attorney with the Riddell Law Group in Sarasota. She is a member of the Florida bar and admitted to practice in the U.S. District Court for the Middle District of Florida. She practices in Sarasota, Manatee, Pinellas and Lee counties.