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Principal Reduction Programs – What Are Your Options?

House inside of a fishbowl symbolizing underwater mortgageUpdate – Homeowners who have Bank of America as their lender may get a big surprise in the mail soon… An offer to reduce their principal mortgage balance by as much as $150,000!

In a recent settlement with the with state attorneys general and the U.S. Department of Justice,  Bank of America committed over $11 billion to reducing principal balances via their principal reduction program.

Here is what you need to know if you have B of A as your lender:

This program is real! Do not discard your letter if you get one, you will not be eligible anymore if you do.  The letters are being sent via certified mail and are clearly from B of A, unlike the advertisements you may have received from companies if you were late on your mortgage payments.

This brings up another good point, the letters are going out to homeowners who are 60 days or more late on their mortgage payments.  The reductions are said to reduce payments by up to 35%, so this is a targeted effort to help those homeowners who have tried other options and they simply have not worked.

In addition to being late on your mortgage, homeowners also need to have an income.  You have to be able to show you can afford the new mortgage payment if your balance is reduced.

Borrowers homes also have to be “underwater” to qualify.  This simply means your home would have to be worth less than you owe on your mortgage, which is very common for many homes purchased in the last several years.

Here’s the deal – 200,000 letters are being mailed out to various homeowners who Bank of America determines qualify (by using a net present value test to determine if the reduction of principal will save over foreclosure for investors).  This means you have to just sit back and wait for your letter to arrive, right?  Maybe not?  BestMortgageLoanModification.com says “Many borrowers don’t realize you can call certain departments from B of A and determine if you are eligible for the principal reduction program rather than waiting for a letter to arrive.  We have had instances where a borrower calls us looking for a HARP refinance and we see they have lates, which makes them ineligible for the program.  We have directed the borrowers to call B of A directly and inquire about the reduction program, which has resulted in some borrowers receiving confirmation over the phone that they do in fact qualify. They are ecstatic when this happens!”

If you meet the criteria above and would like to see if you qualify for the program,  why not give B of A a call and see if you are a candidate?  The worst that can happen is they say “no”, while on  the other hand you may be able to get a principal reduction up to $150,000!

While this deal was part of a settlement, B of A has stated that they will reduce more than the $11 billion dollars in mortgages if more people respond to the letters than expected.  This is a wonderful opportunity for homeowners who are struggling to make their payments.  Time will tell if other lenders will jump on board and begin to offer reductions on their own without legal action, but if this program is a success it may very well happen much more than it currently does.

End update

Principal reduction programs are a highly sought after option for homeowners who find themselves in an “upside down mortgage.”  There are a lot of scared and frustrated homeowners doing everything they can to keep their homes.

Before we get into the particulars, just so we can make sure we’re on the same page, let’s take a look at the most common reasons homeowners like yourself may need to look at a program like this as an option – when their mortgage is upside down.

What Exactly Is An Upside Down Mortgage?

This happens when a home has negative equity.  When the real estate market collapsed in the U.S. a few years ago, the buying frenzy came to a screeching halt. It even became hard for people with good credit to purchase a home.  With many homes on the market and not enough buyers, the market dropped drastically leaving home values much lower than before.  This created many U.S. mortgages with negative equity problems.  And when you have no equity, you cannot refinance.


Here’s an example of an upside down mortgage.

For example, you bought a home in 2005 for $300,000 and put 30,000 down.  Your principal balance was then $270,000.  By 2009 it was worth $175,000 and your principal balance is now at $250,000.  You are now upside down $75,000.

If any of the above sounds like your situation, you can breathe a sigh of relief. At least you know you’re not alone.  Okay, so now let’s get into the details of how to reduce your mortgage principal, how these programs work and what you may want to consider.

What Are Principal Reduction Programs?

In a nutshell, this kind of program reduces the mortgage back to a balance that is more in line with the current value of the property. So referring to our previous example, the new principle amount would be based on the $175,000 value. Essentially getting rid of the negative equity and also allowing you the homeowner to be able to make your mortgage payments.

Some lenders have programs that can do this once the modification is approved and others can do a balance reduction in steps, say over 3 years time.

We have seen this happen with Wells Fargo, where each year a certain percentage is knocked off the loan balance.  This is pretty cool, you make your payments on time and your mortgage balance shrinks…

The  Principle Reduction Alternative (PRA)

Homeowners may reduce the principle on their mortgage via the Principle Reduction Alternative program if they qualify.  How do you qualify?

The qualifications for this program include:

Mortgage is not owned or guaranteed by Fannie Mae or Freddie Mac.
You  must owe more than your home is worth.
You must live in the home carrying the mortgage you want to modify.
You got your mortgage on or before January 1, 2009.
Your mortgage payment is more than 31 percent of your gross (pre-tax) monthly income.
You owe up to $729,750 on your 1st mortgage.
You have a financial hardship
You have documented income to prove you will be able to make the modified payments.

Is This The Answer To Your Problem?

Maybe or maybe not.  Remember your lender needs to be convinced that it is in their best interest to lose money by reducing the principle on your mortgage.  They will use NPV (Net Present Value) calculators to decide whether it is in their best interest to reduce the principal balance or foreclosure and sell the property.

It’s not going to be an easy decision to make on your part.  But if you’re in trouble financially, you can’t afford to waste time thinking about it.

If you do satisfy the requirements, the most difficult part of the process is submitting the correct documents and filling out the application itself.

That may not seem like a big deal.  Gee how difficult could it possibly be..right?  Well, you have no idea how easy it is to leave out just one little document…and have your application denied.  Yep.  It happens like this quite often.  That means you’ll have to start the process all over again.

Now What?

It may be in your best interest to consider a loan modification service to assist you in the application process.  You can save yourself from a lot frustration and stress by allowing experts to guide you through the process.

You can visit BestMortgageLoanModification.com to see if you qualify, call 888-766-3693 or read about other companies that may be able to help HERE.

Most mortgage balance reduction programs are quite complex.  The process involves tons of documentation and the ability to negotiate a fair and balanced deal for yourself.  There are also other loan modification programs you should take into consideration as well.  A qualified loan modification expert can help you choose the best option based on your situation.

NOTE – If you are CURRENT on your mortgage payments for the last 6 months, you may be able to use the HARP 2.0 refinance option.  This will not reduce your principal mortgage balance, but it will allow current homeowners an option refinance to today’s low interest rates and reduce your monthly payments if you have a high interest rate.




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