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Exploring Principal Reduction (Including Loan Modification)

If, as a homeowner, you find yourself in the situation where your mortgage is underwater, you know what a disheartening situation it can be. You may be thinking about trying to identify a good principal reduction program.

Here are details and definitions related to principal reduction programs that shed some light on why it’s become so important and necessary for so many homeowners, how it works, and how it can be achieved:

  • Underwater mortgages (A word on the problem):
    Just to clarify, what do we mean by referring to a mortgage as being underwater? It’s also referred to as an upside-down mortgage, or a negative-equity mortgage. It refers to a situation where your home is worth less than the amount that you owe on it. It drastically undermines the investment potential of your home, and makes it very difficult to obtain refinancing. If this situation is true for you, make no mistake, you are one of millions of homeowners in this country who share your burden.
  • What’s the cause? (A word on how we got here):
    When the housing market bubble burst, so did consumer consumer confidence along with it, and homes sales figures plummeted across the country. With an abnormal increase in the supply of homes for sale, and not enough people purchasing them, home values across the United States steadily started to fall. Of course, just because house values are falling, does not mean that the associated loan amounts are kind enough to decrease as well, and therefore, we have the problem that we have today.
  • Principal Reduction Programs (A word on what it entails):
    What this entails is principal balance reduction. It in effect means that a portion of the mortgage is written off. When principal reduction takes place, it brings the size of the mortgage more in line with the depreciated value of the home, and also results in reduced mortgage payments because less loan is being repaid over the same period of time. This kind of mortgage principal reduction can take place as part of a loan modification which is intend to provide you with sustained and significant mortgage relief if you’re a homeowner struggling to avoid foreclosure.
  • Principal Reduction Alternative (A word on a federal offering):
    This is a program offered by the Federal government as part of its Making Home Affordable initiative. The program is intended to motivate servicers and lenders to make principal balance reductions available to homeowners with underwater mortgages. Eligibility for the program is dependent on a number of criteria including: your mortgage is not owned or backed by Fannie Mae or Freddie Mac, your mortgage is underwater, you occupy the house as your primary residence, your mortgage took effect on or before January 1, 2009, your loan payment is over 31% of your gross (pre-tax) monthly income, you owe a maximum of $729,750 on your 1st mortgage, you can document real financial hardship, you have enough, documented income to cope with the modified payment, and you must not have been convicted within the past decade of felony larceny, theft, fraud or forgery, money laundering or tax evasion, related to a home loan or real estate business deal.
  • Loan modification (A vehicle for possible principal balance reduction):
    If you’re a homeowner whose mortgage is underwater, you may need to talk to your bank about a loan modification that enables you to benefit from some kind of principal reduction program. There are a variety of loan modification options that are available through federal initiatives as well as private, in-house options offered by lenders themselves. Getting a principal balance reduction program to work in your favor can put you in a much more affordable financial situation.

 

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