Foreclosure & PMI
Private mortgage insurance (PMI) plans protect your mortgage lender in case you default on your loan and the lender forecloses on your property. Unfortunately, though you will not benefit from private mortgage insurance should you be foreclosed upon, you are responsible for paying the insurance premiums during the life of your mortgage.
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Who Needs PMI?
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No one is required by law to carry private mortgage insurance. However, your lender may require you to carry the insurance before agreeing to finance or refinance your home. In most cases, if you fail to provide a cash down payment equivalent to at least 20 percent of the value of your home, you must purchase PMI. In most cases, your PMI premium will be approximately 0.5 percent of your total loan price per year. Your lender may divide the premium into installment payments for you throughout the year, holding the money in an escrow account until premiums are due.
Foreclosure
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If you default on your loan, and efforts to refinance or modify your loan into more affordable terms fail, your lender will foreclose on your property. Once the foreclosure is complete, your lender will present its losses to the mortgage insurer, at which time the insurer will reimburse part or all of the expenses and property losses your lender incurred during the foreclosure process. The insurer will compensate the lender the difference between your down payment and 20 percent of your home's purchase price. For example, if you purchased your home for $100,000 and paid a 5-percent down payment of $5,000, your lender is insured for $15,000 if you default.
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Legal Action
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If your lender incurs a loss that exceeds the amount of money your private mortgage company insures your property for, the lender may sue you for restitution of the difference. You may face wage garnishment if the lender wins. You can either fight the lawsuit by hiring a lawyer, or you can avoid foreclosure altogether by asking your lender to agree to a short sale of your home or a deed-in-lieu-of-foreclosure agreement. A short sale is the sale of your home for less than the amount due on the loan, while a deed-in-lieu-of-foreclosure allows you to sign over the deed of your home to your lender and walk away. With both options, you can negotiate with your lender to agree not to sue you for a deficiency on your loan.
Bankruptcy
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If you declare bankruptcy, you may receive an exemption from paying delinquent loan values on a foreclosed property. The bankruptcy will also give protection from collection attempts and lawsuits from second and third mortgage lenders as well. Because the foreclosed property no longer belongs to you, there is no longer an asset to secure these delinquencies, making them eligible for discharge in Chapter 7 bankruptcy, or reorganization under Chapter 13 bankruptcy rules.
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References
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