Dear Dr. Don,
I live in Michigan -- with all the foreclosures, how does private mortgage insurance come into play?
If someone had PMI on a primary residence and went into foreclosure, would the PMI protect that person from a possible deficiency judgment from the mortgage company? Or does PMI only protect the lender?
-- Meg Mortgage
Dear Meg,
Private mortgage insurance is structured to protect the lender. The lender accepted a higher loan-to-value on the property when making the loan, but required PMI to partially insure it against taking a loss if it wound up owning the property.
The borrower agrees to make the premium payments as a condition of the loan. The lender files the insurance claim if the borrower defaults on the loan.
The lender may still be able to pursue payment from the borrower and a deficiency judgment may be awarded by the court against the borrower. Ways to negotiate around the deficiency judgment may include a short sale or a lien placed on other property owned by the borrower.
Bankrate's bankruptcy adviser, Justin Harelik, recently wrote a column titled "Short-sale risks." In the article, he points out some of the potential pitfalls with a short sale. The lien would continue the obligation to repay any deficiency but can be useful in protecting the homeowner's credit history.
Real estate laws vary by state and you should consult with a real estate attorney if you are trying to get out from under your house while also trying to preserve your credit and/or avoid bankruptcy.