mortgage insurance for seller-financed property

[Nancy Roth]

I am about to sell an investment property to a tenant who got a settlement and can now afford a down payment. She is very eager to buy. I own the house free and clear, and would provide seller financing. This is the first time I've done this.

I plan to offer the buyer a choice of loans. One has a down payment of 25% of the agreed price, with a shorter term loan. She can afford this, and it is really her best choice, because she ultimately pays less for the property. I benefit by getting more cash up front. This lowers my risk, although I make less profit by the end of the loan.

But she may want to put down a lower down payment and pay the remainder over a longer period. I am willing to offer her a loan with a down payment equivalent to 18.75% of the agreed price, allowing her to hold onto more of her cash, but ultimately she will pay more for the house. This means in the long term it is more profitable for me, but in the short term I have the risk of less up-front cash.

The difference in profit is not huge, and all things considered, I'd prefer that she accept the higher down payment. But I feel it's important to give her a choice, and either choice is acceptable to me.

So here are my questions. Has anyone who seller-finances been able to secure mortgage insurance? Should I seek it, if she chooses the lower down payment option? Where would I find an insurer willing to issue a policy to me? So far I have only found ones that issue to institutional lenders. My insurance go-to doesn't know of anyone.

Just go be clear, I'm talking about the insurance that institutional lenders roll into the monthly payments of borrowers who put down less than 20% of the price of a property. I believe the mortgage insurance fee is lifted when the borrower has paid back 20% of the principle.

I'd appreciate your thoughts.

[Dion DePaoli]

Mortgage Insurance as a whole is based on standardized underwriting guidelines.  Most of the guidelines base their criteria off of DU, DO or LP findings.  Typically private lenders do not go to this length to underwrite loans.  

To be clear, what that means is the private lender would abide by and use those Fannie Mae and Freddie Mac established guidelines with perhaps overlays which are slightly more conservative.  In much of what I see today, private lenders exist very distant from those types of guidelines.  

The challenge in the private lender area is that there is zero established standard.  If there is no standard there is nothing to base risk on and with no risk understanding nobody will insure.  

As Wayne mentioned Mortgage Insurance does not make the lender whole.  it is an insurance against loss after the asset has been fully disposition.  As one might imagine the process to be paid on a claim is no walk in the park.  This too adds a layer of difficulty for a private lender.  The loans must be serviced properly which doesn't always  happen.