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I'm not a MI expert but it works like this: For a bank to be secured in a mortgage, they want 20% equity in the home. The reason being is that when the bank sells a home in default, there are many legal, admin, and government fees they need to pay before being able to recover their money. A mortgage insurance company insures the difference between the 20% equity requirement and how much the borrower put down. If a borrower defaults, the house technically belongs to the bank and they can sell it, but the answer to this really depends on the laws of your state. In most states, this is the case.
There are different scenarios, depending on whether the loan is backed by PMI (buyer paid) or LMI (lender paid) or FHA (government guaranteed).
The culmination of foreclosure is the auction. Others can bid for that home, but banks often bid what is owed (which is usually more than current fair market value), and then they get the home.
Then the bank will list the property for sale. If the property does not sell for at least the mortgage principal remaining, the mortgage insurance will pay the difference.
For example, if the mortgage payable was $183,000 and the property sold for $160,000, the PMI will pay the bank the $23,000 difference.
If the loan is backed by LMI, typically found on a 90% LTV, fixed-rate mortgage, investors require 25% MI coverage. This means that, in the event of a claim, LMI is responsible for paying 25% of the outstanding balance, leaving the lender at risk for 67.5%.
On an uninsured loan, the lender is at risk for the entire loan balance.
If the home loan was government guaranteed i.e. an FHA loan, then FHA pays the bank that issued the loan the full outstanding balance. Then FHA will take over the property, and attempt to recover as much as possible through the sale of the property.
At the auctions, if bank bid on what's owed on the home, do they have to pay that amount? Or because it's too themselves, they don't have to pay that amount bid?
At the auctions, if bank bid on what's owed on the home, do they have to pay that amount? Or because it's too themselves, they don't have to pay that amount bid?
No, the bank doesn't have to show up at the auction with all cash, like private investors are required. They already previously put up the cash for the note when they bought the original loan.
It's really more of a paperwork formality whereby title reverts back to the lender from the defaulting party.
If the bank or investor wants to cash in their chips & unload the property at auction, they can authorize the auctioneer to drop the bid price to closer to current fair market value, & then private parties may step up to the plate.
If the bank or investor prefers to test the market & sell it themselves, they leave the auction bid price at the current amount owed, & of course, no one else is going to want to take it.
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