What is private mortgage insurance and who gets the money when a person cannot fullfil their loan obligations?

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If you don’t put down 20% on a home loan you must pay Private Mortgage Insurance. So with all these loans going belly up why did people pay this and who took the money?

6 Comments
  1. Reply
    stephenweinstein
    January 28, 2011 at 11:05 am

    The money goes to the lender. However, not everyone paid PMI. As you mention, if someone puts down 20%, then they do not need to pay PMI. Also, a person does not need to keep PMI forever; once they pay back enough of the loan, they can drop the PMI.

  2. Reply
    Richie Rich
    January 28, 2011 at 11:30 am

    Not all lenders require PMI on their loans regardless of how much the LTV is.

    PMI is basically insurance you pay for so it can pay the lender (so they can resell your house) if you default on it.

    PMI is generally required for those the lender does not believe can pay for the loan. Some lenders were doing 2 loans to prevent people from paying it, but raised the overall costs doing so and increased the chances of the notes going belly up.

  3. Reply
    don1862
    January 28, 2011 at 11:45 am

    Private mortgage insurance pays the lender if the borrower is unable to pay. The borrower is still liable for the debt, and the private mortgage insurance company usually only pays after a foreclosure. Some Private Mortgage Insurance companies have gone bankrupt.

  4. Reply
    mbrcatz
    January 28, 2011 at 11:54 am

    OK, about 5% of the loans are being defaulted on. After the house is foreclosed upon, and sold at auction, the mortgagee gets paid the difference between what the house sold for at auction, and the mortgage balance and fees (auction & foreclosure fees). Then the negative amount, gets sold as a collectable account, and the homeowners are STILL responsible for it.

    The “sub prime mortgage” fiasco isn’t so much about houses going to foreclosure – it’s about the market for sub prime mortgage loans – no one wants to BUY them any more as an investment.

  5. Reply
    Quicken Loans
    January 28, 2011 at 12:47 pm

    Hi there!

    Private Mortgage Insurance, or PMI, is insurance that protects the lender in case you default on your loan. With conventional loans, mortgage insurance is generally not required if you make a down payment of at least 20 percent of the home’s purchase price. (Note, however, that FHA and VA loans have different insurance guidelines.)

    Private mortgage insurance is generally included in your monthly mortgage payment and may be tax-deductible (double check with your tax advisor). Of course, lenders know that not every home buyer has the funds to provide a 20% down payment. That’s why some lenders offer innovative loans designed to avoid costly private mortgage insurance.

    To answer your second question, PMI is designed to protect the lender or the company servicing your loan in case the homeowner defaults. The reason PMI exists is exactly for the reason you mentioned… as insurance to the lender/servicer in case the homeowner is unable to manage the home loan payments any longer.

    Hope this helps!

  6. Reply
    Impartial.co.uk
    January 28, 2011 at 1:33 pm

    Private Mortgage Insurance is an insurance policy which protects the lender and not you. You are just allowed the wonderful privilege of paying for it! It was a real problem back in the 90’s as many borrowers thought they were protected from negative equity only for the lender to chase them afterwards. It covers the lender in the event of the borrower being unable to pay their loan and the lender subsequently making a loss on the repossession and sale of the borrower’s home. The fee for this is usually added to the initial loan and people have had to pay for these because in most instances it would have been a condition of the lender before granting the loan. It will be what you call small print but since 1993 house prices have risen steadily and the risk of someone needing to use the insurance has been non existent. It is often classed as a hidden fee that your independent mortgage broker (http://www.wwfp.net/mortgage/mortgage-broker.html) will be able to highlight for you as a total cost of product through APR

    Disclaimer:
    The answers above are for guidance only and should not be acted upon without you receiving professional mortgage advice relevant to your circumstances. To find an independent mortgage adviser please go to http://www.impartial.co.uk.

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