How to Avoid PMI on a Short Sale
A short sale occurs when a mortgage company allows a homeowner to sell his home for less than the loan payoff amount. Private Mortgage Insurance or PMI is implemented to protect a lender in the event the borrower defaults on the home loan. The Homeowner's Protection Policy is a federal law that requires lenders to disclose information regarding PMI. Any loan that is associated with Fannie Mae and Freddie Mac may have PMI added if requirements are not met. There are ways to avoid paying PMI on a short sale.
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Instructions
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Contact the lender that carries the loan on the home. If the loan has been paid down enough and the home has equity, the lender may not require you to purchase PMI if you use that lender to finance the home.
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Place a 20 percent down payment on the home you are buying. Any loan that is below an 80 percent loan-to-value ratio is not required to carry PMI.
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Have the home appraised. Purchasing a home that appraises for more than you are borrowing can help you avoid PMI. If the home you purchase has 20 percent in equity, the lender will not require PMI.
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Contact a lender that is not associated with Fannie Mae or Freddie Mac for your home loan. This can be a local bank or a mortgage broker that works with several lenders. Many lenders do not require PMI if you have a good credit score.
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Accept a higher interest rate. Some lenders will waive the PMI if you agree to have a higher interest rate on your home loan.
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Take out a second mortgage for 10 percent of the sales price, and then make a down payment of 10 percent. This will make your loan amount equal to 80 percent of the home's value. This is called the 80-10-10 loan.
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Tips & Warnings
Mortgage interest is tax deductible and PMI is not. Taking the option for a higher interest rate may benefit you on taxes.
Shop around before you accept a mortgage loan, but do not let each lender pull your credit. Checking credit can cause your score to go down.
Work to keep your credit good. Having a good credit score can reduce your interest rate and PMI amount.
References
Resources
- Photo Credit Sold Home For Sale Sign on Burst image by Andy Dean from Fotolia.com
