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Looking for an ‘Advance’

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Posted On: 09/23/2009

Q: Because of financial problems we’re having trouble paying our mortgage. Someone said we might be able to get help with a “claim advance” from our lender. What’s a claim advance and how does it work?

A: A claim advance does not come from a lender, instead it comes from a mortgage insurance company.

If you buy with conventional financing and less than 20 percent down you typically need private mortgage insurance. With PMI you can buy with less than 20 percent down but in return you must pay an insurance premium.

With PMI you pay for coverage, but if there’s a claim it’s the lender who’s the beneficiary of the policy, not you. Naturally, mortgage insurance companies want to hold down costs and one way to do this – sometimes – is with a claim advance.

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The way it works is that first you must have a loan with mortgage insurance. This sounds fairly basic, but remember all those folks in the past few years who financed homes with piggyback loans to cleverly avoid mortgage insurance premiums? Nope, no claim advances for them.

The PMI company comes into the picture when they see that a loan is in trouble or if you contact them. They then have to determine if the loan can be saved. For instance, maybe you had an accident and couldn’t work for a few months but will be able to get back to your job. If the loan can be saved, then the PMI company might extend a low-interest loan to bring you current with the lender or they might give the lender money to reduce the interest rate and monthly costs to make the mortgage more affordable, what’s known as a buydown.

Notice that a “claim advance” is the name for this type of help. Here’s why. Let’s say that the claim advance does not work and the house is lost to foreclosure. The PMI company still can face a claim from the lender for losses on the loan. The advantage of a claim advance is that it may save a home, but if the property is lost the money spent on the claim advance reduces the size of the payment that might be due.

Claim advance economics can make good sense for PMI companies. When a home is lost the company can owe big money to the lender, say 20 or 25 percent of the loan amount plus a bunch of expenses. Claim advances tend to be far less costly and those lower costs help the insurance company.

Not everyone facing foreclosure can qualify for claim advance assistance, but if times are tough and your financial problems seem short-term it can’t hurt to ask.

Q: We have homes in our community that used to cost $500,000 and are now selling for $300,000. Are these houses a good buy?

A: What homes used to sell for doesn’t count. Instead, ask yourself some questions:

If you bought a property for $300,000 could you re-sell it now at a higher price? Enough to also cover marketing and closing fees?

If you bought a $300,000 property could you rent if for enough to pay the costs of mortgage interest and principal as well as property taxes, property insurance, repairs and other costs? If not, can you afford the monthly negative cost?

Is this a property you want for your personal use because it has great qualities and you intend to own it for many years?

Given your local market could the price fall even further in the next few months?

All properties are unique. Speak with local brokers and get more information about local housing, population and job trends. Then see what makes sense in terms of your market, your preferences and your financial situation.

Q: Is this the time to become a real-estate agent?

A: In a lot of markets there are fewer transactions and thus fewer commission dollars for real estate professionals. Look around and you’ll see that even in slow markets some brokers continue to do very well. In essence, there are fewer deals, but the top professionals are getting more of the business which remains. When local markets improve they’ll be in a great position to do even more business.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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