You Might Be Able to Stop Foreclosure with a Mortgage Insurance Claim Advance

By Gina Pogol
Mortgage Credit Problems Columnist

Rose Asks: Dear Gina, We're having bad credit and financial problems and trouble paying our mortgage. I heard from a co-worker that we might be able to get something called a "claim advance" from our lender. What's a claim advance and how does it work?

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Gina Says:

Dear Rose,

I am sorry that you are having mortgage credit problems. Your co-worker is right; there is something called a claim advance, and it might help you.

A claim advance does not come from a lender; it comes from your mortgage insurance company. But first, you need to have a mortgage insurance company. If you bought your home with conventional financing and put less than 20% down, you probably have mortgage insurance (MI).

However, many bad credit lenders don't require mortgage insurance. Loans for people with bad credit have higher interest rates. This compensates bad credit lenders for making riskier home loans to people with bad credit. If that's the case, you don't have a mortgage insurer to get a claim advance from. Ditto if you bought with a piggy-backed loan and have a first and second mortgage but no mortgage insurance.

If you do have MI and default, it's the lender that gets paid, not you. However, mortgage insurance companies want to hold down costs and one way to do this--sometimes--is by helping troubled borrowers out with a claim advance.

The MI company gets involved if you are having mortgage credit problems and contact them. The insurer then determines if the loan can be saved--for instance, if you were very ill and couldn't work for a few months, but are back at work now. If you can resume your payments, the insurer might extend a low- or no-interest loan to bring you current with the lender or it might give the lender money to reduce the interest rate and monthly costs.

It's called a "claim advance" because from an insurer's point of view, that's what it is. If the help it gives you doesn't work, and the house is lost to foreclosure, the MI company gets a claim from the lender. The purpose of a claim advance is to try to avert the foreclosure. However, if the loan goes bad, credit for the mortgage help is given to the insurer. The lender's claim is reduced by what the MI company already spent helping you.

So by assisting you now, the insurer may save itself a lot of money down the road. When a home is lost, the insurer may have to pay the lender at least 20% of the loan amount plus a bunch of expenses. Claim advances tend to be far less costly to the insurance company.

Not everyone facing foreclosure can qualify for assistance. If you have no income and bad credit, your mortgage lender and insurer are unlikely to offer help. But if your financial problems are short-term, it can't hurt to ask.


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