If you are significantly underwater on your mortgage (you owe more than your property is worth), you may be able to reduce the amount you owe on your home as part of the Principal Reduction Alternative program. Read on to learn more about how this program can assist you if you are having trouble making your mortgage payments.
Get Help With Your Underwater Mortgage
The Principal Reduction Alternative (PRA) is part of the government’s Home Affordable Modification Program (HAMP), which was introduced to help struggling homeowners by reducing their monthly mortgage payments by modifying their loans. Through HAMP with PRA, the mortgage servicer reduces your payments to a more affordable percentage of your income and forgives part of what you owe over time.
(To learn about other programs that assist struggling homeowners, visit our Government Foreclosure Prevention Programs area.)
HAMP reduces monthly mortgage payments. If eligible for HAMP, the loan servicer gives the borrower a trial period modification, where he or she is required to make reduced payments for a three-month period. So long as the borrower successfully completes the trial period (and his or her financial information and eligibility remain the same), he or she will receive a permanent loan modification under HAMP. Read more about HAMP.
If a mortgage loan is being considered for a HAMP modification, then the loan servicer must also consider whether a PRA principal reduction should be given to the borrower as well.
The PRA program gives relief to the borrower by permanently reducing the balance of the loan. Under PRA, some of the principal of the loan is forgiven and it is not required to be paid back as long as the borrower remains in good standing (not more than 60 days delinquent) on the HAMP modification.
How the PRA Program Works
PRA is a deferred principal reduction program that allows a borrower to earn the principal reduction (the “PRA Forbearance Amount”) over three years. Over the three-year period, one-third of the PRA Forbearance Amount will be forgiven each year (on the anniversary of the borrower's first trial modification payment) until the entire amount is forgiven, as long as the borrower remains in good standing. In this manner, the entire PRA Forbearance Amount is eventually reduced to zero. (If a borrower loses good standing, any reduction in principal that has not already been forgiven is considered a non-interest bearing principal forbearance for the remaining life of the loan which becomes due when the borrower sells, refinances, or at the end of the loan term.)
Borrowers who receive a principal reduction under PRA should consult a tax profession to discuss potential tax implications related to the principal forgiveness.
You may qualify a principal reduction under the PRA program if you meet the following criteria:
- You are underwater on your mortgage (you owe more than your home is worth) with a current loan to value ratio greater than 115%.
- Fannie Mae or Freddie Mac do not own or guarantee your mortgage. (For mortgage loans that are owned or guaranteed by Fannie Mae or Freddie Mac, eligible homeowners may be offered HAMP modifications under related programs, but these related programs do not contain the principal reduction provision.)
- The home is your primary residence.
- The mortgage was taken out on or before January 1, 2009.
- Your monthly mortgage payment amount is greater than 31 percent of your gross (pre-tax) monthly income.
- The outstanding balance on your first mortgage loan is no more than $729,750.
- Your are delinquent on your mortgage payments or are in danger of falling behind and have experienced a financial hardship.
- You can provide evidence of income sufficient to support the modified payment.
- You have not been convicted of felony larceny, theft, fraud or forgery, money laundering or tax evasion, in connection with a mortgage or real estate transaction within the last ten years.
For More Information
For more information about HAMP and PRA, go to www.makinghomeaffordable.gov, select “Explore Programs”, then click on “View All Programs” and look at “Home Affordable Modification Program (HAMP)” as well as “Principal Reduction Alternative SM (PRA),”
Contact your mortgage servicer to find out if it participatea in HAMP and to determine if you are eligible for PRA. You can also call 888-995-HOPE (4673) if you have additional questions about getting mortgage assistance.