If you default on a mortgage with PMI does the PMI cover the shortfall and if so is the homeowner reponsible?

Question

If you default on a mortgage with PMI does the PMI cover the shortfall and if so is the homeowner reponsible for the deficit if the house goes to foreclosure?

Answer 1

The PMI (private mortgage insurer) covers the lender against default by the borrower, so the deficiency is covered by the PMI carrier. However, when borrowers go into foreclosure and have PMI, the PMI carrier pays off to the lender and guess who gets a visit from the PMI carrier in the form of a legal judgment ? Yes, it would be the borrower. The PMI carrier only covers the lender against losses, but it is NOT prevented from seeking a judgment against the borrower for what it had to pay to the lender.

Answer 2

The PMI is actually designed to cover only the top portion or percent of the loan, and will only cover the entire short fall if the coverage is sufficient. Most PMI coverages are sufficient, but not always. For example, a 90% loan might have 25% coverage, so 75% of the 90% is all the way down to 67.5%, which is usually more than low enough in a public sale. Regardless of who is ultimately responsible for the loss (the lender or the PMI company), legally, most states allow for the lender to try to collect the deficiency, but most lenders don't bother. The most I've seen is a quick and easy lawsuit that generates a deficiency judgment, and the borrower owes it but never pays. The worst part is that the borrower has a tax liability for the forgiven loan, because it was a loan when it was going to be repaid but became income at the point it wasn't actually repaid.

Answer 3

PMI covers only a portion of any loss the lender may incur. Whether or not the homeowner may be subject to a deficiency judgement is determined by the meathod of foreclosure allowed by your state and chosen by your lender.