What is principal reduction and how does it help homeowners?Posted: November 11, 2016
How much does principal reduction help homeowners struggling with their mortgage due to a financial hardship?
All these homeowners have benefited from Keep Your Home California’s Principal Reduction Program, which offers as much as $100,000 in principal reduction – all for free. In fact, almost 9,500 homeowners have been approved for the Principal Reduction Program.
The popular program assists homeowners with unaffordable and/or underwater mortgages in California. About one of every eight homeowners with a mortgage in California has a negative equity mortgage.
Almost half of the homeowners approved for Keep Your Home California in second-quarter 2016 were enrolled in the Principal Reduction Program.
The program lowers principal – the amount owed on the mortgage – and also often reduces the monthly payment. In fact, the average homeowner approved for the Principal Reduction Program enjoyed a monthly mortgage payment reduction of $258, from $1,400 to $1,142.
That means fewer dollars owed and more money in your pocket. It’s a winning combination for everyone, from homeowners to local businesses.
San Francisco homeowners Charles and Kathleen save about $300 every month, thanks to Keep Your Home California’s Principal Reduction Program. “It’s like a weight taken off our shoulders,” Charles says.
The lower monthly payments have definitely helped Elaine of Southern California, who was forced into an earlier-than-planned retirement and receives significantly less income, mostly from Social Security. Her principal was reduced by $81,500, which lowered her monthly mortgage by almost $400.
“It’s really made a big difference,” Elaine says
Bettie and Gordon, also of Southern California, save a few hundred dollars every month from the program.
“That was probably one of the happiest days of our lives,” Bettie says of when she and her husband were approved for the Principal Reduction Program. “The big thing is we are still in our home, and we can stay here.”
And that’s the goal behind the Principal Reduction Program. A vast majority of homeowners who have received principal reduction assistance from Keep Your Home California remain in their home two years later.
Keep Your Home California has three forms of principal reduction. Each plan helps homeowners in a unique way.
- Principal Reduction-Affordability – Provides principal reduction assistance to eligible homeowners with an unaffordable mortgage payment, defined as a debt-to-income ratio greater than 38% of the gross household income. The homeowner does not need to have an underwater – or negative equity – mortgage. The average homeowner has their principal balance reduced by $64,478, and the monthly payment by $296.
- Principal Reduction-Recast – Allows homeowners to obtain an affordable payment and lower total debt associated with their negative equity mortgage without using a servicer-provided loan modification. The rate and terms of the loan do not change, the loan is simply re-amortized based on the new, lower outstanding principal balance, which leads to lower monthly payments. The average homeowner has their principal balance reduced by $56,306, and the monthly payment by $217.
- Modification – In conjunction with a servicer-provided loan modification, program funds are used to lower the homeowner’s outstanding principal balance. The modification changes the terms of the mortgage to ensure the homeowner will have affordable monthly payments going forward. The average homeowner has their principal balance reduced by $37,193, and the monthly payment by $540.
Now, homeowners must have endured a financial hardship, such as a job loss, cut in pay, divorce, death in the family, extraordinary medical bills, or other financial challenges in order to qualify for the Principal Reduction Program. Keep Your Home California representatives will help determine whether the hardship qualifies for the program.
Homeowners must meet county-by-county income requirements and their mortgage servicer – the company that collects the monthly payment – must participate in Keep Your Home California. Almost 190 servicers are enrolled in the Principal Reduction Program, including Bank of America, Wells Fargo and U.S. Bank.
Homeowners interested in learning more or applying for the program should call the counseling center at 888-954-KEEP (5337) or find more information at www.KeepYourHomeCalifornia.org or www.ConservaTuCasaCalifornia.org for Spanish speakers. The counseling center is open 7 a.m. to 7 p.m. weekdays and 9 a.m. to 3 p.m. Saturdays. Calls can be taken in virtually any language through a free translation service.