A Realtor's Guide to "PMI & Short Sales"

Mortgage and Lending with San Diego VA Home Loans/858-777-9751

N.B.- This post is an excellent starting point but gets better as the reader scrolls through the comments.  I was fortunate enough to draw the attention of my friend  Bill Archambault , long-time lender and Realtor.  He clarifies a few fine points and offers an opinion about negotiating short sales.  

PMI is known as the acronym for private mortgage insurance.  Private Mortgage Insurance is used when a borrower has less than 20% for a downpayment. Private mortgage insurance protects mortgage lenders against potential losses in the event of borrower default.  The insurance company, collects a monthly premium from the borrower (based on risk analysis) and agrees to pay the lender a certain amount of money if the loan defaults (usually 20% of the loan amount).  It's model was based on FHA loans and their mortgage insurance premium (called MIP, probably to confuse you).  FHA and VA offer guarantees to the lender equal to as much as 25% of the mortgage balance.

If a borrower defaults on his conventional mortgage (goes 90 days late on a payment), the lender files the state-specific foreclosure notice and sends in a claim to the insurance company to recover as much as 20% of the mortgage balance.  This, in turn, gives the lender a smaller risk when the lender sells the property to recover their losses.

Let's assume we have a $300,000 loan for a property that was purchased last year for $317,000.  Could that property have dropped in value since October of 2005 ?  Well, if it was a condo in my hometown, San Diego, it may be selling for as little as $260,000 today. Assume it costs about 8% to sell the property.   You, the Realtor, should know two things:

How much will the lender receive from the insurance company if the borrower defaults? 

$300,000 times .20= $60,000

What price must the lender sell for to not have a loss?  

Well, the lender's exposure has been limited to $240,000 now that they received $60,000 from the mortgage insurance company.  We take $240,000 divided by 92% (remember that it costs 8% to sell so the 92% represents the net proceeeds).       $240,000/.92= $260,900.

Why is this so important to you, the professional Realtor?  When negotiating an offer for a property that would result in a short payoff to a lender, you need to remember this fact:  PMI claims will mitigate some of that loss.  If you know that a seller has PMI on their mortgage, you have that much more wiggle room when negotiating a short sale with the lender.  Lenders have been known to attack Realtors' commissions as much as 50% when a short sale exists.

Knowing your numbers and how PMI affects a lender will help you defend your commission. If you understand the net effect the sale will have on a lender, your short sales will go much more smoothly.  

Comments (72)


Iam working on a short sale the property was appraised for 687.000, but they owe 830,000 I have a offer for 699.000.  But the PMI company wants the sellers to sign a 75,000 promissory note. Any Ideas! 

Sep 28, 2008 03:25 AM
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA

Have the sellers sign a promissory note, Coni; they're getting a $50,000 break off their original debt

Sep 28, 2008 06:06 AM

How can the PMI company demand money from you? Can you write off what they collect from you? Will the bank reduce the amount on the 1099 by the amount that you agree to pay the PMI company?

Nov 11, 2008 12:43 PM

I am in the middle of a short sale currently where the seller overpaid for a property 2 years ago.  He owes $98k and comps now are saying it is only worth around $53k.  I have a good  cash offer on the table for the property, everything seemed to be going good until the lienholder informed me the seller has UGIC pmi on the loan.  They then tell me this has screwed up other short sales at closing as UGIC will require the seller to sign a promissary note at the closing table.  Who on here has encountered this problem?  Is there any way around having him sign a promissary note, because I don't think the seller will be willing as his credit is toast already.  How can a pmi company go after the seller?  This doesn't make sense to me.  For example: If I'm in a car accident and make a claim my auto insurance won't come back and tell me I owe them for the amount of the claim, if they would what would be the point of even having auto insurance in the first place?  Is anyone following me here?  Everyone on here seems to be very knowledgable, any info will help...thanks


Dec 06, 2008 12:27 PM
Paul Morinishi

I think someone should read the Mortgag Insurance contracts.

Is there a clause in the contract that covers short sales?

Or does the insurance only cover defaults and sales due to foreclosure?

Ultimately, the bank may have to foreclose, then resell the property. I assume they can only make a claim on the mortgage insurance after the property is sold by the bank. In a short sale, the bank also has the option to negotiate a settlement with the mortgage insurance company. If the deal makes sense, then bank may determine that it would be less expensive to settle for a smaller amount with the mortgage insurance company, and both allow the short sale to go through.

I've never done this, but it seems like a reasonable solution. The insurance company pays out less, and the bank doesn't incur the cost of foreclosing and reselling the property.

Dec 15, 2008 08:44 AM

Here's my short sale tale...

I found the house, liked it, decided to put an offer, then realized it was a short sale.  It came on the market at $210k, worked it's way down to $180, then $160, then $140, I put an offer of $120K.  That was 2 months ago.  I've been told through my agent that the selling agent says it's good to go, and the bank has accepted my offer, just waiting for final approval from the PMI department at the lienholding bank.  If this actually flies, what a tremendous deal for me.  Any thoughts or ideas from anyone?

Dec 24, 2008 07:03 PM
Steve Winfred

I agree that short sales are a great tool for struggling homeowners, it helps the homeowner who is burdened by a legitimate hardship, and the banks net more money than a lengthy foreclosure. I have been working short sales in California and have had great success. If any one would like help please feel free to contact me: Oliver@thelajollateam.com

Also Check out: http://www.ShortSale2020.com

Mar 18, 2009 02:05 PM
Diane Wheatley

My seller was asked to agree to a $25,000 promissory note payable at $123.00 per month for a term of 204 months (17 years) in order for an approval on her short sale. 

My question is why would my client agree to this obligation in lieu of walking away and allowing the home to go to foreclosure?  How will this be reported on her credit report for 17 years?  Does she have any further negotiations available to her in order to facilitate the short sale?

Diane Wheatley, SoCal

Jun 08, 2009 09:43 AM
Sandy McAlpine
Search Lake Norman Homes For Sale - Lake Norman NC

Great tips! I didn't know this information. I will definitely apply it to my next short sale opportunity

Jul 14, 2009 02:53 AM
Stefan C Jezyck

I need help to understand this better. I understand the PMI element. I have a short sale I am presently dealing with. The lender or servicing company is staing that they are waiting for the pmi company to approve, deny or counter the offer that has been submitted.

Why is the pmi company a part of this negotiation? I understand that they may be working together so as to make sure no money is wasted between them. But usually the banks have not worked or played well with others.

Can you shed some light on this for me? You can email me directly as well.

Stefan Jezycki in the Napa Valley, CA

Oct 07, 2009 07:45 AM
Ray Spitler
Keller Williams Realty - Plymouth, MI

We received an approval of short sale on Sept 3, 2009. No mention of PMI. Now we are closing tomorrow and upon review by negotiator, suddenly PMI is noticed and sent the information. The come back requesting $25,000 promissary note payable at 0% int for 7 years at about 296 per month.

We were to close tomorrow!! Buyer has movers planned, Seller has taken day off work, and Wham! We are hit with this killer info that totally blows us out of the water! Unbelievable!

Did the Negotiator miss it? Whoever is responsible, does not matter. Probably will not close and Seller will not pay a dime to PMI. CMG is PMI company. I realize we can surely negotiate down, but Seller will not pay a dime at this point. She says "let if forelose"!!! I am done!

Any suggestions???

Oct 14, 2009 02:42 PM
Scott Collins

To understand PMI, you have to understand what it pays in the event of default and how it arrives at that amount.

What doe PMI pay? PMI will pay your bank ‘up to' an agreed upon percentage of the outstanding loan balance at the time of default. To this figure it will add costs associated with disposing of the property. In cases too rare to give much consideration, they may even buy the house and try to sell it themselves.

Most people think that percentage is 20%. Some even think it's 80%.

PMI works like this. If you have a down payment of less than 20% of the value of your purchase, the bank will require PMI. Now that it's been determined that you need PMI, erase the 20% figure from your head, because your actual coverage is not based on that. It is based on the actual percentage that you borrow and the actual value of the home (LTV).

All major PMI providers have a schedule of coverage based on LTV at the time the loan originates. Let's take a $100,000 property. If your original mortgage is $95,000, you have an LTV of 95%. PMI coverage for this loan will typically be 30% of the outstanding balance, not the original balance. If you default, PMI will pay the bank 30% of this outstanding balance. Same original mortgage of $82,000 (82% LTV) will have a PMI coverage rate of 16%. Why? There is less risk of the buyer in the second scenario defaulting before reaching 80% LTV than the first.

What does all this mean for short sales? Very basically, the PMI insurer is generally not contractually obligated to pay the bank anything if the bank ‘voluntarily' chooses to take a loss (short sale). It is only obligated to pay if the bank is forced to take a loss (foreclosure). In essence, in a short sale you're asking PMI to pay now instead of later.

Taking our first scenario, if the banks loss through short sale would result in PMI paying the 30% plus fees, PMI will likely refuse because it will pay the same amount 2 years from now after foreclosure. That is because there is a coverage cap on PMI and you're at the point where it can't get worse for them. It might even get better if there is a rebound.

But what if your short sale contract only results in PMI paying out 15% now versus 30% later? Obviously, it could get worse for the PMI insurer. Now you're in a position to negotiate.

In short (no pun), before determining whether or not to take on a short sale with PMI, you need to determine the actual coverage and exposures of the insurer. If your seller doesn't have this info, figure out the LTV through publicly recorded sales price and mortgage. You can then amortize the loan amount from origination to the date they stopped paying to estimate the payoff. Subtract a reasonable potential sales price, commissions and accruing interests to see if there is any incentive for the PMI insurer to negotiate.

Good luck.

Dec 08, 2009 12:58 AM

Since the PMI is basically asking for an unsecured loan from the seller, wouldn't a Chapter 7 bankruptcy make the loan disappear?

Dec 10, 2009 05:25 AM
Kathleen MacKenzie
TampaHomes24-7.com - Tampa, FL

I am currently working a short sale with a first and second mortgage.

The second has just come back with the following:

This account has lien insurance and will have to be approved by Old Republic before we can do a short sale they require 25% of the propel balance $ 60,320.00 to even submit to them and this amount could change once we submit to Old Republic they could request more....this is just a starting offer !

Since this is my first short sale with two lenders, this took me by surprise.  I am not quite sure that I understand.  Can anyone help me here?

Dec 14, 2009 09:22 AM
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX


"Lien insurance?"

Isn't this nice they want 25% of their money to even consider your proposed short sale! That's nice.

Think about this and consider today's value of the property, and the current value of the first. Can the second payoff the first and recover anything? They are telling you you have to pay for them to consider getting anything! Unless there is equity the get nothing in a foreclosure!

If you're the listing agent understand not all lenders will co-operate. It's there money! 

If you're the buyer's agent you can buy the property as an REO after sale. I've had properties under contract with in 10 minutes of the sheriff's sale! There is always more than one way!

Good luck


Dec 14, 2009 10:41 AM
Renee Przysiecki

As a realtor wouldn't be in the Sellers and my best interest to have an attorney involved in the short sale to explain to the seller all their obligations?  Also, to help negotiate the first, second and insurance?  I have an attorney that charges the seller $400 and will pay back after the closing.  In the event it does not close she will keep it.

Any suggestions?

Jan 03, 2010 09:12 AM
Kim Taylor
Sun Valley Resort Realty - Ketchum, ID

What if the in a short sale the second mortgage has MI?  We've agreed to the offer from the bank but now they are sending it off to UGI who holds the second for review.  Any ideas to help?

Thank you.

Apr 21, 2010 02:29 PM
Angela Niece
RE/Max Results - Wayzata, MN
Trust the Results of Hard Work!

Here is one that has not been commented on.  I have a short sale with BOA that I have negotiated.  BOA is on board.  The second in a non participating and not on my HAFA participating lender list.  I learned this week that they have the 136,000 dollar second mortgage 100% insured via Old Republic.  This give the second lender no reason to negotiate.  What I am trying to find out is if anyone know how long the term might be on a MI/PMI policy from Old Republic.  I believe that the lender buys the insurance for a certain term.  I want to know if it might be five years.  Does anyone know who might know how long these policy terms might be on a second mortgage?


Minnesota Foreclosure Minnesota Short Sale

Apr 22, 2010 08:47 AM
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

Wow! From 11-06 to today 4-22-10.


The answer is the life of the loan or until the loan reaches an LTV of 78%!

There is always more than one way. If your man wants the house and the second won't cooperate buy the frist!

If your buyer doesn't have all cash use the note and mortgage he's buying and his down payment to secure a new loan, then foreclose! The worse that could happen is the second pays you off at face value of the first plus cost! I wrote about this in an article called "Beat The Sharks"

Good luck.


Apr 22, 2010 12:27 PM

I am dealing with a nightmare similar to the above, and would like to know if anyone has dealt with this situation, and hopefully found a successful resolution to the problem...I am representing buyers' purchasing an upper end home in our community. Sellers are nice people, but going thru a difficult divorce.  Lender is Wells Fargo, and there is MI thru Radian Insurance.   We have been told thru the negotiator (using that term lightly, we feel like we are being blackmailed, and forced to pay ransome!), that the MI is requiring the Sellers to sign a $50,000 note to approve the Short Sale.  Needless to say, this is not gonna happen!  Talked to my buyers and the initially wanted the home so bad, that they were willing to pay $25,000 cash at closing to make it work.  Wells agreed, but found out today that no approval has been requested the MI; in fact, they were not aware that there needed to be a new HUD submitted because of the reduced appaised value.  But after checking their finances, the buyers realize that they were incorrect with their finances, and are short on the $25,000, and they will not let them make payments. 

 My Question: Has any one else been held hostage by the MI company?  The sad thing is that the loss mitigator from the MI company seems very nice, and most of the people at Wells do also.  But, we are having the problems with the negotiator, and keep being put back with her, and it seems like she will take pleasure if she can succeed in making this deal crash & burn.   Any ideas, or positive suggestions will ge greatly appreciated.  I am running out of time...

Apr 27, 2010 12:18 AM