Stockton Real Estate Blog

The New Princple Reduction Program for Underwater Mortgages for Stockton Homeowners

The Federal government announced a new “Principal Reduction Alternative” (PRA) program and was added to the Home Affordable Modification Program (HAMP) effective October 1^st 2010 providing government incentives for lenders to reduce outstanding principal balances on loans as part of a modification.  This should be good news for Stockton and Lodi home owners whose mortgages are greater than the value of their home. The Stockton and real estate market has been especially hard hit by the down turn in the economy and many of the homes in Stockton for sale and listed on the MLS are either foreclosures or short sales.

To meet the requirements for HAMP, a mortgagee must be spending more than 31% of their gross income to pay their debt. Previously, the program was intended to decrease the debt to income ratio to no more than 31%,  first, through an interest rate reduction; and then through a lengthening of the payback time on the loan, typically to 40 years.  If this didn’t do it, the borrower was typically rejected for the modification unless a lender was willing to make some other loan payment adjustment but generally this didn’t include principal reduction on the amount owed. The consequence was that only 4.5% of loans in reality got modified under HAMP and for those that were modified, 60% later failed because either the property wasn’t worth the debt or the borrower had other financial difficulties. The new PRA was intended to improve this depressing outcome.

Under the new HAMP Guidelines creating PRA servicers are required to evaluate all HAMP-eligible loans where the loan balance is greater than 115% of the property’s fair market value to determine if a principal reduction is advantageous. Servicers are encouraged to offer the principal reduction to the borrower although they are not required to do so. The reduction is earned over a three-year time frame and in the beginning is treated as a PRA Forbearance. Each year for three years that the borrower is in good standing on their loan payments, one-third of the original PRA forbearance amount will be reduced. This reduced amount will be applied to their unpaid principal balance and, at the end of the three year period; the loan would only be 115% of the fair market value at the start.

To take part in the Principal Reduction Alternative, borrowers must still meet HAMP‘s basic requirements:

Ø  The home owner must be facing a financial hardship.

Ø  The property must be a personal residence

Ø  The debt to income ratio greater than 31%;

Ø  The loan balance cannot be greater than $729,750

Ø  Mortgage originated prior to Jan 1^st of 2009

Ø  The home owner must be facing a financial hardship.

If you think that you qualify for the HAMP Principal Reduction Alternative, get in touch with your lender right away. The PRA may be just the ticket to benefit both borrowers and lenders to get through the storm. The Lilly Team at PMZ Real Estate is short sale, HAMP and HAFA Certified. For more information hlilly@pmz.com  or 209-479-922 or visit our website at www.homes-in-stockton-forsale.com .

 Stockton Neighborhoods: Brookside, Lincoln  Village, Morada, Morada Ranch, Beck Ranch Spanos Park, West  Spanos  Park, Weston Ranch, Port of Stockton, UOP.

Stockton and Lodi Zip codes: 95208, 05204, 95205, 95206, 95207, 92209, 95210, 95212, 95215, 95219, 95242. 95240