December 1, 2014
The recent gains in home prices have helped some homeowners get out from “underwater”, a situation where the homeowner owes more on the home than it is worth. However, there are still far too many Americans in a negative equity position in their home.
Halfway through 2014, there were still around 5.3 million underwater homeowners, or approximately 10.7% of all residential mortgages. If you are still in this unfortunate category, what can you do?
You can work with assistance programs and your lender to make your payments more tolerable. One of the most powerful tools for assistance is the Principal Reduction Alternative program available through the Home Affordable Modification Program (HAMP) at the Department of Housing and Urban Development (HUD). PRA can reduce the overall principal of your loan, greatly improving your ability to make payments.
You need to meet the following conditions to qualify:
- Mortgage Holder – For the PRA program, your loan must not be held or guaranteed by Fannie Mae or Freddie Mac. If it is, you still have other options available through HAMP such as temporary modification of interest rates or extended loan terms, but not principal reduction.
- Occupancy – The house in question must be your primary residence, and you must have purchased the home on or before January 1st, 2009.
- Debt and Income – Your mortgage debt must be no greater than $729,750 (first mortgage), your loan-to-value (LTV) ratio must be 115% or greater, and your mortgage payment must consume more than 31% of your monthly pre-tax income. You must also be delinquent on payments or be in imminent danger of doing so.
You must have a demonstrated financial hardship, and yet have sufficient proof that you have enough income to handle a modified payment. That may sound contradictory, but it really is not. For example, an unexpected medical bill combined with a poorly timed loss of home value can throw a financially cautious family into an underwater position with stifling short-term debt.
- Clean Record – Your record must be free of various felonies related to finances, taxes, and real estate fraud for the previous 10 years.
Not all lenders participate in HAMP and PRA, but many do. The website lists over 100 loan servicers including Bank of America, Wells Fargo, and JP Morgan Chase. You can check out the searchable list under the PRA section of www.makinghomeaffordable.gov along with links to submit an application.
PRA works via providing lenders incentives to rework your loan, on the assumption that they would rather modify terms and lose a bit of money than to be stuck with another foreclosed property and receive no money.
If you qualify, a portion of your principal is set up as a non-interest-bearing principal forbearance (a temporary suspension of that component of your principal). This forbearance lasts for three years, and is contingent on you making all of your agreed-upon payments and staying “within good standing” on your loan.
One year’s worth of forbearance is forgiven for every year that you stay in good standing. Keep this up for three years, and your principal reduction will be forgiven. If you fail to keep up payment, any part that has not been forgiven will end up as a non-interest-bearing balloon payment due at the end of the loan term.
The effect of a PRA on your taxes is not always straightforward, so it is wise to check with a qualified professional. However, you can get some background on the IRS website at http://www.irs.gov/uac/Principal-Reduction-Alternative-Under-the-Home-Affordable-Modification-Program
If you are underwater and struggling with your mortgage, check to see if you qualify for PRA. Forgiveness of some of your principal is about the best type of modification that you can receive; so don’t pass up the opportunity.
Photo ©iStock.com/Craig Cozart