What is principal reduction and how does it help homeowners?

How much does principal reduction help homeowners struggling with their mortgage due to a financial hardship?

Just ask homeowners Charles and Kathleen, Gordon and Bettie, or Elaine (click the links and read their stories).

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.


Charles and Kathleen

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.

California Suburban Sprawl


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.



Sometimes change is good, especially when it provides as much as $100,000 in principal reduction for underwater homeowners


Keep Your Home California officials are always looking to improve the free mortgage-assistance program for hard-hit homeowners. The program has undergone many changes since starting in February 2011. The next four blog posts will detail many of these program changes – and how they help homeowners.

California’s housing market continues to improve, with double-digit price increases every month for the past 24 months (as of February 2014).

Despite the dramatic gains, many homeowners are still upside down or “underwater” on their existing mortgage, meaning they owe more than their home is worth. In fact, according to a recent CoreLogic report, nearly one out of every eight California homeowners with an existing mortgage owes more than the value of their home. In some regions, such as the Central Valley and Inland Empire, the percentage of homeowners with underwater mortgages is much higher.


Keep Your Home California – a federally funded, state managed program – could help homeowners reduce their principal by as much as $100,000. The assistance provided through the Principal Reduction Program can get homeowners closer to being right-side-up on their mortgage. An improving economy and housing market could do the rest to return homeowners to a positive equity situation.

Since it started in February 2011, the Principal Reduction Program has undergone many changes with the goal of helping more homeowners who are struggling with their underwater mortgages.

For example, a dollar-for-dollar match requirement from mortgage servicers was eliminated in late 2012. This change was made to attract more mortgage servicers – mission accomplished (see below) – and make more homeowners eligible for the program.

In November, Keep Your Home California officials made another major change – a loan-to-value ratio of 140% or greater qualifies as a financial hardship, opening the door for more homeowners to apply for the Principal Reduction Program.

It’s a big change since homeowners must demonstrate a financial hardship in order to qualify for any of the four Keep Your Home California programs. Other types of qualifying financial hardships include a job loss, a decrease in income, a divorce, extraordinary medical expenses, etc.

These changes have allowed the free program to assist many more homeowners. Keep Your Home California approved 1,619 homeowners for the Principal Reduction Program in 2013, a huge increase from the 940 homeowners during the previous two years, combined. The $158.4 million in total Principal Reduction Program funds that were provided by the end of 2013, represented a 384.1 percent increase from the end of 2012.

Homeowners are also being approved faster – about 70 days during the fourth quarter, compared to 110 days since the program started. The average homeowner approved for the program received $77,000 in principal reduction – and enjoyed a 23 percent drop in their monthly mortgage payment, saving about $360 per month.

There are some additional requirements to qualify, including meeting the county-by-county income limits – from about $69,000 to $126,000 – and the homeowner’s mortgage servicer must participate in the program.

Currently, about 120 mortgage servicers – including Wells Fargo, Bank of America, Chase and Citibank – are enrolled in the Principal Reduction Program. In comparison, only 11 servicers participated in the principal reduction effort in December 2011.Change has been good for Keep Your Home California – and the thousands of homeowners who have benefited from the mortgage-assistance program. And officials will continue to look at new ways to improve the program.

If you have additional questions, would like more information or want to apply for the program, call 888-954-KEEP (5337) or visit www.KeepYourHomeCalifornia.org  (Spanish speakers should visit www.conservatucasacalifornia.org).

The counseling center is open 7 a.m. to 7 p.m. weekdays and 9 a.m. to 3 p.m. Saturdays.  Translators are available, so counseling sessions can be conducted in virtually any language.

Image courtesy of ddpavumba / FreeDigitalPhotos.net