To make a long story short: I am buying a short sale home. The house was selling for $359,900, I made an offer for 330,000. The bank countered by $5,000. I accepted the counter. After waiting over a month, the bank accepted the offer and said they will approve the sell. Yesterday, my agent called me and said that the listing agent informed her that I have to also pay an extra $5,264.00 for a Mortgage Insurance Contribution that must be paid before closing, which is the end of December. I assume this came from the bank. Since I really want the house, It looks like I will have to bite the bullet and fork up the extra money.
Would someone please explain to me what is the purpose of the buyer having to pay a Mortgage Insurance Contribution. What the heck is this!
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Can someone say, "Held hostage by the bank?"
Hi Richard,
Again, LOVE that you are asking good questions that we all can benefit from the education. The contributions on this website are great and really enjoy reading them.
GREAT DEFINITION for Mortgage Insurance on website: http://www.ehow.com/facts_5071124_definition-mortgage-insurance.html
Here's how it works, when a loan has a MI, if the lender adheres to their requirements, the MI pays the bank a percentage of the loan balance TO THE BANK.
The question is ... why would they ask for additional money? It could be a variety of reasons, but is most likely one of two issues : the seller has the ability to contribute or the loan to value was too low. (Market value to net Sales Contract amount).
In many instances, the bank makes more money if the property forecloses. If the MI requirements are met, the lender is paid by the MI AND the proceeds from the foreclosure. The lender they will still make more money than the loan balance, again, if the lender adheres to the MI requirements.
There are situations where the MI asks for cash contributions that unreasonable. Mortgage Insurance companies are no longer profitable and, in my opinion, avoid approving claims. Also, if there is MI on the loan, there are essentially TWO investors. The MI Company and the bank. Again, short sales are voluntary; thus they are able to set their own requirements for approval.
If you are willing to wait for the property, potentially for an additional 30-45 days, I would have the Negotiator challenge the $5K cash contribution request from the MI Company. In many cases, a dispute (with good documentation) will be approved and negated.
Hi again Elizabeth,
Thanks again for the inter-works of the MI. It works pretty much the same here. The argument here is, it's not my MI, it's the seller's MI. As in all cases, unless buyers buy with cash or a large payment, we pay our own MI. Sometimes, banks buy MI regardless. So, why would I want to pay for someone's else additional problem in the eleventh hour, unless I really wanted that property badly? What I'm saying is, the 2 industries should communicate more efficiently throughout this process to avoid late requests. It seems that they look at the buyer as just an open check book.
The other point is as a buyer, you really don't know for sure when these request come by because you're not a party to those negotiations. The buyer is really the person that is held hostage. My intent is to leveling the playing field. It's to protect my vested interest, so that I don't eventually fall into the same predicament as the seller somewhere down the road.
Richard, the buyer is not privy to the sellers financials and the sellers lender because it is none of the buyers business. In my area, we are required to disclose to the buyer in MLS that the property is a short sale and it may require the lienholder(s) permission to sell. The buyers should know what they are getting into with a short sale and as a matter of disclosure, we make the buyer sign a document that explains how the short sale process works just so we know that they are at least aware. Keep in mind that the buyer should know where the short sale is in every step of the process and that comes with communication with the listing agent and the buyers agent. If the buyers agent can not translate or fails to translate the listing agent updates, that is not anyones fault but the buyers agent. If the listing agent is not communicating any updates, it would then be time for the buyers agent to take action and not stop until they can get answers.
IF the buyer had full access to the short sale negotiations, how would that benefit the buyer in anyway? Would it help if you knew there was MI on a loan but would not know if the MI company is going to approve the short sale until it the servicer or lender actually send the file to the MI company for review and approval? Keep in mind that there are several types of MI and the one that ALWAYS is a surprise is when we find out that it is lender placed MI and not PMI. At any rate they have to approve the short sale because they are going to be required to pay a claim on it. Not sure how having access to the short sale process would help this in any way for the buyer.
You don't think that the sellers MI is your problem but you want the benefit of the lender approving the short sale? Can't have it both ways. Why would you want to pay for someone else's additional problem? That is an easy one... You want the home and it fits your wants and needs and you are not paying more than it is worth. If you feel you are paying more than it is worth, you can walk away. No hostage holding here, the buyer is free to make their own decision.
You keep saying you want to level the playing field but have yet to give one single example of what you to happen to level the playing field. You have to remember that the banks are under no obligation to you or under any obligation to even look at the short sale, not to mention no obiligation to approve the short sale.
Last but not least, what is it that makes you think the MI company is coming in late asking for the contribution? Remember that a short sale is a process and MI company is usually the last piece of the puzzle, not the first.
Most likely in this case, the seller does not have the cash to contribute so the buyer is being asked to contribute.
1. Agreed! Buyer does not need to do anything they don't "want" to. I dont think anyone is saying the buyer has to accept these terms. It is there choice to do so if it makes financial sense, meets and fits within there budget and satisfy there emotional desires to purchase the home of there dreams.
2. I don't think your understanding the internal workings of some of these deals. For example a boa negotiator will take a file, review it and based on guidelines, formulas and net numbers he may send a counter through equator. In fact it is my belief that regardless of what the offer is he is required to send a counter no matter what. Please remember his goals is to MINIMIZE loss. He also gets reviewed on how complete his file is and graded on everything being put together properly before submission to investor. So he submits a counter, listing agent conveys to all parties and buyer agrees. File is sent to investor. Investor approves and files is sent to MI. mI reviews and since MI is the one who will have to payout they now request cash contribution to reduce there loss. So in this scenario where did the listing agent drop the ball or fail to disclose a potential fee he could never know what would be?? At best he could have let everyone know that since there is MI there may be a request and to not be surprised when it comes.
3.100% agree
4. I don't think this comes down to being extremely skilled. A HUD reflects the costs and without seeing it I don't think any of us can blindly just say "find a way to spread over 5k on thehud and problem solved". Yes more skilled professionals may be able to think of creative solutions but all in all it comes down to brass nose negotiations. I've had many instances when I received request from MI above $10-$30k only to get $500 or $0 approved.
5. No, there are no written rules or guidelines and remember I am not just saying every buyer should be expected to incur this cost. I agree with you however if the buyer agrees, understands, has the ability and ultimately will still have what they perceive as a deal or an emotional satisfying purchase than it's there choice to make.
Hi again Eric,
As always, I value your honest opinion. Regarding item no. 2, I been singing this tune for a long time. I believe the process should have been changed long ago and I've been saying this for a while now. I fully understand what's happening inside the banks and it's strickly to their advantage. I don't think it is efficient, nor will I ever agree with it.
Anyway, I've always argued the MI company should see the file as quickly as possible so that the buyer has only one decision to make at the end, and only if it should arise, rather than being nickled and dimed as he goes. I work on multi-million dollar projects all year long and clients absolutely hate being nickled and dimed. They want me to come to them only with the big stuff. And, if there are costs increases, I'd better have great explanations and justifications for them. Even worse, I could be stuck absorbing the cost and lose the client permanently. It's about accountability and I can never see where real estate should be different. If it requires changing processes, then NAR should be promoting this at the highest level to better serve all their clients, including the buyer.
If the seller's current mortgage has mortgage insurance, then the MI company must also give their final approval in a short sale or REO transaction. For loans with MI, the bank or mortgage company does not have the final say in terms offer by a buyer. That decision lies soley with the MI company as they are the ones who will ultimately be paying the insurance claim to the mortgage company or bank thereby incurring the biggest loss.
Paid in cash before the closing.
I have a serious problem with this part of the sellers MI demand.
This means that these funds WILL NOT be on the Final HUD.
I would find out WHO the MI company is? If it is PMI they are now in receivership and this may explain things as well as what they are demanding might be illegal.
Ask for a copy of the written short sale approval review it and identify if there is any reference to this MI demand.
If not.
You could counter offer the MI company with a $1,000 paid at closing and on the Final HUD1.
Hi SE Davis,
Would you please explain why it might be illegal for the MI company to be asking for a contribution if they are in receivership? I have a BofA transaction that is with the MI company now and the property is located in AZ, which probably means the MI company is PMI. Thanks.
Requiring payment before the closing, that condition not being part of the short sale approval and the obvious end game of that disbursement not being on the final HUD1 is what I believe may be illegal.
Referencing PMI was pure speculation and their being in recievership does not prevent them from requesting a contribution "as long as it is paid at closing" and is on the Final HUD1.
I've closed many BAC short sales with MI and they are very upfront about everything so far.
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