Principal Reduction Plans From Making Home Affordable–Can Homeowners Benefit From Principal Forgiveness?

Mortgage payments have been a problem for numerous homeowners over the past months and for those who are having difficulty related to negative equity, principal reduction plans have been sought out in the hopes of homeowners getting a more affordable mortgage principal for their situation. One option that homeowners may be able to take advantage of is the Principal Reduction Alternative plan, which is part of the Making Home Affordable Program.

Obviously, homeowners who can have a portion of their mortgage principal forgiven where negative equity is in place may stand a better chance at getting the affordability they need if they have certain types of home loans in place or, for homeowners who simply view their house as an investment, these principal reductions have been incentives for some to avoid strategically defaulting.

Yet, many of these principal reduction plans are often at a mortgage servicer’s discretion, which many feel to be the source of the problem when homeowners are unable to get a reduction on their home loan. While there have been some financial institutions who have offered principal reductions or earned principal forgiveness programs, there have been other major servicers who simply stated that they do not feel principal reductions assist homeowners with affordability when an underwater mortgage is present.

Homeowners have been incredibly frustrated when they are in a situation where they owe more on their home than their home is actually worth, which is understandable. However, some programs that offer underwater refinancing will, again, require that a servicer reduce a homeowner’s principal, and this may be unlikely due to the amount of foreclosure prevention assistance plans and alternatives to foreclosure which are in place.

Homeowners who may not qualify for a foreclosure prevention option, like a modification, but are still seeking a principal reduction because of negative equity may be prompted by their servicer to use a short sale option on their home. Some homeowners are still able to make their monthly payment despite having a severe negative equity problem, and in cases such as this some servicers are simply unwilling to reduce a homeowner’s principal since default is not imminent.

Yet, for homeowners who may be in a situation where their underwater home loan is causing them strain in their financial life and a have either defaulted or are at risk of becoming delinquent on their mortgage, these principal reduction plans may be available, along with other foreclosure prevention options either from federal or in-house programs directly from lenders.