If you default on a loan and the lender sells the home for less than the outstanding balance, but you had PMI, what will affect the lender’s loss?

When you default on a loan and the lender sells the home for less than what you owe, the lender faces a potential loss on the outstanding balance. Private Mortgage Insurance (PMI) is designed to protect the lender in such situations. The coverage percentage of PMI is crucial because it determines how much of the lender's loss can be covered by the insurance policy.

If PMI provides coverage for a certain percentage of the loan amount, this will directly reduce the lender's financial loss when a property is sold for less than the remaining mortgage balance. For instance, if the PMI covers 20% of the loan amount and the loss amounts to a certain figure, the lender can claim that percentage back through the insurance, thereby affecting the remainder of the loss they must absorb.

In contrast, while payment history, loan amount, and property value change are important factors in the overall context of the loan and the default situation, they do not directly impact the extent to which PMI can mitigate the lender's loss in this specific scenario. Thus, the coverage percentage of PMI plays a pivotal role in determining how much of the lender's loss can be offset.