If you fall behind on mortgage payments, it’s helpful to know that you may have a rich and powerful ally. Your mortgage insurance company may give you a claim advance to help you avoid foreclosure.
What Is A Claim Advance?
Huh? What’s a claim advance? And why would a mortgage insurance company be so helpful?
To get to the answer – and to explain why you might be able to avoid foreclosure – you need to go back to the way you financed the home.
If you bought with less than 20 percent down, the lender no doubt required that you get private mortgage insurance (MI). You were able to buy with a lot less cash upfront because you got MI.
In times when real estate values are rising, using MI can make a lot of sense. That’s because using MI, you can purchase an asset with a growing value long before you might be able to save 20 percent down. As it happens, home values have been rising steadily in most areas.
This means that the use of MI has been generally good for mortgage borrowers. According to the National Association of Realtors (NAR) June 2017 existing home values showed an increase for the “64th straight month of year-over-year gains.”
Help When Behind On Mortgage Payments
So where does a claim advance come into play? Let’s set the scene.
A few years ago, you bought a home with five percent down plus private mortgage insurance. Everything was great during the first few years of ownership, and then things got rocky. Salaries froze, hours declined, and finally your employer bought a software package and replaced you completely.
Pretty soon savings ran out, mortgage payments were missed, and one day, you faced foreclosure.
When a home is foreclosed, it’s put up for auction and sold to the highest bidder. If the sale price is enough to pay all lender claims, then that’s it: no more hassles from the mortgage company.
But, if prices turn down and the property sells for $210,000 and you owe $230,000, there’s a $20,000 shortfall. The mortgage insurer is on the hook for that $20,000.
Claim Advance & Mortgage Insurance
Mortgage insurance becomes important when things go wrong. If the lender must foreclose – something it does not want to do – it can count on the mortgage insurance company to cover some or all of the losses. In most cases, this is done with a payment to the lender, but in some cases, the mortgage insurance company might actually buy the property.
But — again in some in some cases — it may be possible to avoid a foreclosure altogether with what are generally called “claim advances,” “partial claim advances,” or “second look” programs.
The way it works is that if your finances change you contact the settlement agent who conducted closing or your lender and get the name of private mortgage insurance company. Get them on the phone and ask about claim advances.
At this moment your goals and the goals of the mortgage insurance company are aligned. You’re a team. You don’t want to be foreclosed and the MI company doesn’t want that either.
How A Claim Advance Can Help
The MI company, if it offers a claim advance program, will look very carefully at your situation. If it feels you can be saved from foreclosure it might elect to:
- Bring your mortgage current.
- Buy down your mortgage rate by making a payment to the lender so your monthly costs are lower.
- Offer a wage subsidy so you can get back on your feet.
Why would a mortgage insurance company offer a claim advance? Three reasons stand out:
First, it can be far cheaper for the mortgage insurance company to offer a claim advance than to pay off the much bigger costs of a foreclosure.
Second, lenders welcome claim advances – they don’t want foreclosures on their books and a claim advance is a happy alternative.
Third, the money paid by a mortgage insurance company with a claim advance is a credit against any final obligation to a lender. In other words, if the property ultimately goes to foreclosure, if a credit advance does not work and the MI company faces a $40,000 foreclosure bill but has paid out $15,000 in claim advance money, it will owe only the $25,000 balance to the lender.
Claim advance policies and practices differ – and not all MI companies have such programs – but if you can get a “second look” it can prevent a foreclosure. That’s reason enough to ask about a claim advance if times get hard.
What Are Today’s Mortgage Rates?
Mortgage rates today, whether you use mortgage insurance or not, are still very attractive. Recently, interest rates have hit some of their lowest levels in many months. Contact several competing mortgage lenders to find the best deals available to you.