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Where to Turn for a Principal Reduction these Days? Not a Loan Modification!

Where does one go for a principal reduction these days?  Loan modification?  No.  Banks aren’t negotiating principal reductions with loan modifications, just interest rates.  They might reduce your monthly payment or maybe not.  For example, if you were making payments based on an interest only loan before, then you might not see a change in monthly payment as you move into a fixed rate.  It is better terms so the negotiators can consider themselves successful however if you couldn’t make your payments before because they were too high, you might not be able to after the negotiation either.  That’s why 60% of loan modifications go back into default within 6 months.

Short sales on the other hand are a well known solution for borrowers to prevent foreclosure.  They do so by selling their home for less than what is owed.  But most folks want to stay in their homes, so what else can they do?

The key is to get a principal reduction so that your payments are a reflection of the current market value of your home.  Since banks are not negotiating principal reductions in a loan modification then it makes sense to keep looking.  Since you are wanting to stay in your home, a short sale won’t work either.  There are companies out there promoting principal reduction but be very cautious if the promise is within a loan modification because those just are not happening.

With a true principal reduction program, you will have to refinance out of your current mortgage.  Some companies use the term short pay refinance and others just use the term principal reduction.  Most companies are negotiating you out of your current mortgage at a discount and then require you to find a way to refinance the new, lower amount.  For example, if you own a home with a mortgage of $400,000 but the value has fallen to $250,000, the negotiating company will get your mortgage down to the market value of $250,000 but your current lender will have to be paid off in order for the deal to be consummated.

What does this mean for you?

You have to be able to qualify for a new loan.  Either you need to qualify or maybe a family member will help you keep your house by signing for you on the new loan.  These programs are especially tailored to folks who have remained current in their mortgage payments, not suffering hits to their credit from delinquent payments.

Who else can this strategy benefit?

These programs are great for families who are trying to sell their house in a short sale.  Maybe you do want to move out.  When you take advantage of a principal reduction program, you don’t have to be the one who gets a new loan.  Your new buyer can cash you out of your loan.  What this means is that you can sell your home in traditional style and perhaps get some cash back from the sale instead of doing a short sale and getting nothing.  In addition, you’ll save your credit.

Perhaps you are doing a short sale in order to prevent a foreclosure but you really want to stay in your home.  By getting a principal reduction you can stay in your home, if that’s what you want.  Qualifying for a new loan will be your only obstacle.  Perhaps you can enlist the help of a family member if you can’t qualify.

People who are upside down in their mortgage but are required to move because of job transfer can also benefit from this strategy.  With a current market value loan instead of being upside down, there’s a chance you might make some money on the transaction.   At the very minimum, you will save your credit.  If your company is willing to buy you out and take the hit themselves then you can be the hero by telling them about principal reduction programs.  Or if you have a nice new loan then perhaps you’d like to keep the property as a rental when you move to your new location.  Just some thoughts….

What about the folks who really have too much mortgage to handle at any price?

Upside down and really can’t afford your place?  These programs are for you.  It’s the perfect way to buy yourself out of debt and keep your credit intact, saving you thousands of dollars in debt settlement, credit repair fees, higher interest rates in the future due to poor credit, etc.  Believe it or not, many folks have found out the hard way that they really can’t afford to pay half their income towards housing even after the principal reduction.  They would  have an avenue for quick recovery and a principal reduction program is it.  This could be true if you are facing foreclosure.  Get rid of those back taxes, those mortgage arrearages, that unaffordable burden.  Walk with a cleaner slate with a principal reduction program.

What other benefits are there?

With some principal reduction companies your back taxes are rolled into the deal and wiped out.  So are your delinquent payments—wiped out.  Similarly, your credit score can be turned around because if you are working with a good company, they will negotiate a fair write off on your credit report and have the bank drop default status.  Therefore your credit score will not drop as deep as if you had done a short sale or a worse, a foreclosure.  When you refinance out of your old loan, all debt issues are wiped out, if you are working with the proper company.

Most principal reduction programs are not limited to primary residences.  Income properties, second homes & commercial property qualify as well.  This is a program that will really benefit a large slice of Americans who are in trouble, assuming they can qualify for a new loan.  With the next wave of foreclosures coming in the commercial arena, this could really help the economy if people know what their options are.

What are the negative aspects to a principal reduction?

You might not be able to qualify for a new loan and you may be forced to sell even though you don’t want to.  But at least this way you have a better avenue to get out and save your credit.

Be sure to choose a company who will help you move into a new loan and will protect your credit.  Most companies charge about the same amount as a loan modification but offer more lasting results.  Don’t do a short sale when you want to stay in your home.  This program will prevent your foreclosure as well.  Principal reduction is the best way to create a lasting & affordable change in your mortgage.

Please join me in a discussion on this topic.

Peace,
Megan