Making Home Affordable Underwater Mortgage Assistance–Do Home Loan Modifications Offer Principal Reductions?

Homeowners who have struggled to make their mortgage payments have turned to the Making Home Affordable home loan modification program over the past months in the hopes of finding a reduced mortgage payment and more affordability in their home loan. However, homeowners who are facing a situation in their mortgage where negative equity is present often feel they have few options available when it comes to dealing with their mortgage principal. While there are some principal reduction plans available, like the Home Affordable Refinance Program and the FHA short refinance initiative, many homeowners report that principle reductions are not widely given by servicers.

However, according to the outline of the Making Home Affordable modification program, homeowners who receive a permanent modification after successfully completing a trial home loan modification period may have the opportunity to receive a principal reduction. According to the program guidelines, homeowners who make timely payments may receive a principal reduction of up to $5000, or $1000 per year for five years.

Many homeowners in an underwater mortgage situation who are facing the loss of their home may only have the home loan modification program as a way to find affordability in their mortgage payment. Options like the FHA short refinance program may offer homeowners who are current on their home loan the ability to find a lower monthly mortgage payment, but this program has been slow in its early phases as servicers are required to offer a principal reduction, which again, has not been popular among many financial institutions.

While the Principal Reduction Alternative program introduced through HAMP is also in place and offers servicers the option of reducing a homeowner’s principal, this too is at a service’s discretion and may not always be available to homeowners in need. Yet, the introduction of short sales and deed in lieu of foreclosure plans have offered a way for underwater homeowners to escape a bad situation in some instances, but again this requires servicer approval, which may not be offered to all homeowners.

Yet, the Making Home Affordable traditional modification program will offer some form of principle reduction for homeowners who continue to make on time payments despite the fact that many homeowners feel that this reduction is minimal and it may not help all homeowners. While a $5000 reduction in a homeowner’s principal may be beneficial for some, other homeowners have seen a great deal of depreciation in their property value and a principal reduction of such an amount may only offer minimal assistance for those in a severe negative equity situation.