Earnest Money at Risk When Private Mortgage Insurance Denied

Earnest Money at Risk When Private Mortgage Insurance Denied

A couple of weeks ago an agent that I coach called with an interesting scenario. 

She was working with a homebuyer who was successful in making an offer on a home and subsequently received an approval from a mortgage company. The buyers were thrilled and removed loan approval as a contingency for their purchase.

Here’s the catch. 

The loan the buyer was approved for was for more than 80% of the purchase price which triggers a requirement from the lender for the buyer to acquire “Private Mortgage Insurance” (PMI) which would cover the lender in the case of the buyer’s mortgage default up to the 20% balance.

Meaning that if the buyer defaulted and the property was ultimately sold for less than the loan amount, the insurance would protect the 1st 20% of loss. The buyer was putting down only 3% of the purchase price so the PMI was on the hook for a maximum of 17% of the purchase price.

The Private Mortgage Insurance company denied their application.

The buyer could not get a mortgage without the PMI and they had already removed the mortgage contingency which placed their entire earnest money deposit at risk.

I have NEVER seen a Private Mortgage Insurance application declined. It has been a rubber stamp.  It’s been essentially standard procedure for a 3% down purchase being accepted if the lender approved the loan. It wasn’t a rubber stamp this time. The denial was due to the homebuyers’ source of funds for the 3%.

The buyers found a local grant to help with the down payment and supplemented these funds received from their tax refund and stimulus check.

The PMI company felt too little of the 3% the buyer was putting down was from the buyer’s earned funds and would be at a higher risk for loan default. The agent was able to help the buyers procure another PMI company that accepted their purchase financing, and the purchase was completed.

PMI rejection is incredibly rare, but here is the lesson: If you are putting less than 20% down on your purchase, do not release the finance contingency until you have the PMI approval as well.

 

Originally printed in the Santa Monica Star

Photo by Vladimir Solomianyi on Unsplash 

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