If you have suffered a financial hardship and your home is underwater, you may be able to reduce the principal balance of your first mortgage with California's Principal Reduction Program (PRP). PRP is one of the programs in Keep Your Home California. Read on to get an overview of the program, learn how much assistance is available, and find out if you are eligible.
Keep Your Home California
In 2010, the U.S. Department of the Treasury created the Hardest Hit Fund to provide targeted aid to homeowners in those states most affected by the housing market crash. As part of this program, $7.6 billion in aid was allocated to the 18 states, along with Washington, D.C., that experienced the most extreme home price declines and high unemployment rates as a result of the economic crisis.
(Learn more about the Hardest Hit Fund.)
Through the Hardest Hit Fund, California was awarded nearly $2 billion in funds to help eligible homeowners avoid foreclosures by way of four programs, which are collectively called Keep Your Home California. (Get an Overview of Keep Your Home California.) Each program provides a different type of financial assistance to low and moderate-income homeowners. The four programs are:
- The Unemployment Mortgage Assistance Program, which provides mortgage payment assistance to unemployed homeowners.
- The Mortgage Reinstatement Assistance Program, which helps homeowners catch up on missed payments.
- The Principal Reduction Program, which provides funds to underwater homeowners to pay down the principal balance of a first mortgage loan.
- The Transition Assistance Program, which assists homeowners who are undergoing a short sale or deed in lieu of foreclosure transition to new housing. (See our Short Sales and Deeds in Lieu of Foreclosure area for more information on these topics.)
(To learn about the other programs in Keep Your Home California, visit our California Foreclosure Law Center.)
The Principal Reduction Program
The Principal Reduction Program (PRP) provides funds to reduce the principal balance of underwater mortgages in one of two ways:
- in conjunction with a loan modification that includes an interest rate reduction, or
- through a loan recast. (A recast is when funds are applied to reduce the existing unpaid principal balance and a new monthly payment is calculated without a loan modification. There are no changes to the interest rate or term.)
The program provides as much as $100,000 in principal reduction per household.
Borrower Eligibility Criteria for PRP
To be eligible for PRP, you must qualify as a low or moderate-income household based on all of the below criteria.
- Your household income is 120% or less of the California State Department of Housing and Community Development (HCD) Area Median Income for a family of four in the county where you live. (The income limits are higher than you might guess. For example, the limit is $123,600 in San Francisco county and $91,100 in San Diego county. To find out the income limits in your county, go to http://keepyourhomecalifornia.org/income-limits.) Also, a homeowner is presumed to satisfy income limits if he or she has a loan financed in whole or in part by bonds that are tax-exempt under IRC section 143.
- You recently encountered a financial hardship.
- You have completed and signed a Hardship Affidavit/3rd Party Authorization documenting the reason for your hardship.
- You have adequate income to sustain the new mortgage payments.
- You agree to provide all necessary documentation to satisfy program guidelines.
- Your modified monthly mortgage payment ratio is be reduced to at least 38% of the gross household income, excluding unemployment benefits.
- You are late on your mortgage loan payments or are at risk of imminent default and can prove it. Loans in foreclosure are eligible. (Learn more about the California foreclosure process.)
Home Eligibility Criteria for PRP
Additionally, your existing mortgage and the property securing that mortgage must meet the below criteria.
- The first-lien mortgage originated on or before January 1, 2010.
- The current unpaid principal balance for the first-lien mortgage loan is $729,750 or less.
- The home is not abandoned, vacant, or condemned.
- The property is a single-family or one-to-four unit home that is owner-occupied.
- The property is in California.
- The property is your primary residence.
Mobile homes are eligible if they are permanently affixed to the real property that is secured by the first lien. (Learn more about what happens if you are struggling to pay your mobile home loan.)
You are not eligible to request assistance through PRP if one of the below conditions applies to you.
- You filed bankruptcy and the bankruptcy is active. (If you previously filed bankruptcy and it was dismissed or you received a discharge, then you are eligible to apply for the program.)
- You fail to satisfy lender underwriting guidelines.
- The loan to value (LTV) is less than 105%.
- A loan recast or loan modification would result in a post-modification LTV of greater than 140%.
- Your pre-modified total monthly first-lien mortgage payment PITI (principal, interest, taxes, and insurance, as applicable) and escrowed association fees is less than 31% of the your gross monthly household income, excluding unemployment benefits.
Servicer participation in the program is voluntary. (A mortgage servicer is the company that collects monthly mortgage payments from borrowers on behalf of the owner of the loan, as well as tracks account balances, manages the escrow account, handles loss mitigation applications, and pursues foreclosure in the case of defaulted loans.)
Mortgage servicers and lenders, along with Fannie Mae and Freddie Mac, were initially reluctant to participate in the program because it required a dollar-for-dollar match. As a result, of the nearly $2 billion available to help troubled California homeowners, only about one-sixth of that money has been distributed. However, the program has been changed so that the principal can be reduced without a matching contribution from the banks.
Following this change, Fannie Mae and Freddie Mac dropped their opposition to the PRP and more banks, including the largest mortgage servicers such as Bank of America, Wells Fargo, and Chase, have agreed to sign on to the program. (Though these particular servicers are currently limiting their participation in PRP to loan recasts only.)
To find out if your servicer is participating in PRP, go to http://keepyourhomecalifornia.org/participating-servicers.
How the Program Works
If the bank provides less than a 100% match, the assistance is provided in the form of a non-recourse, non-interest bearing subordinate loan secured by a junior lien that is recorded against the property. After five years, the subordinate lien will be released. You only need to repay the loan if you sell the home for a profit or refinance (and take cash out) during that time.
If the bank matches the assistance in an amount equal to or greater than 100% of the PRP assistance provided to the homeowner, then the assistance is not required to be structured as a loan.
How to Apply
To apply for PRP assistance, you can:
- call Keep Your Home California at 888-954-KEEP (5337)
- contact your mortgage servicer directly, or
- visit one of the HUD-approved counseling agencies participating in Keep Your Home California. (To learn more about housing counseling, see our article Free Counseling in California for Struggling Homeowners.)