June 2, 2008

Short Sale & Mortgage Insurance

Paul,

First of all, I can’t tell you enough how wonderful you are for all your help! I can’t find any questions about this, so I thought I’d just ask.

We purchased our home on 100% financed loan, have paid the PMI, and now are doing a short sale. Since the PMI will pay the lender the difference in what we are selling the home for, shouldn’t the lender report the loan as paid with $0 balance, and not give me a big ding on my credit other than the late payments, after the sale is complete? If so, how do I insure this happens? Is it best to call them before it closes to make sure they report it that way, or just wait to see what happens and file a qualified written request?

Rachel

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Hi Rachel,

Unfortunately, that isn’t how you should expect things to play out. The mortgage insurance (MI) insures the lender not the borrower, so when the MI company makes payment for lender’s loss, the borrower may still owe the difference (a/k/a the deficiency). The deficiency may be assigned from the lender to the MI company after the claim is paid, or worse – to a junk debt buyer. All of this should be addresses in the short payoff as part of your negotiation.

What you want is a full release of liability in writing. Here is an example of a short payoff with a full release of liability in contrast to a partial release of liability. What I’ve described in the paragraph above is the lender simply charging off the balance.