Principal Reduction Alternative (PRA)

This is exactly what it sounds like.  If you owe more than your home is worth, the Principal Reduction Alternative allows a lender to write down the Note to the value of the home.  For example, if you owe $200,000, but your home is only worth $150,000 (and you can convince your mortgage company that it is only worth $150,000), the lender may write down the Note so that you only owe $150,000. 

The rationale is that it makes sense for them to lower the amount owed, because if you default and they foreclose on the house, they are only going to get $150,000 for the house on the open market anyway.  And that does not include attorney’s fees, Realtor’s fees, closing costs, etc.

This would seem like an especially great option for the people hardest hit by the “real estate bubble burst” of 2008-09 which caused people to owe double (or more) than what their homes were worth.  One of the main eligibility requirements of this option however, is that your mortgage not be guaranteed by either Fannie Mae or Freddie Mac.  This immediately rules out a significant number of people.  The other eligibility requirements are as follows:

  • You owe more than your home is worth;
  • You occupy the house as your primary residence;
  • You obtained your mortgage on or before January 1, 2009;
  • Your mortgage payment is more than 31% of your gross (pre-tax) monthly income;
  • You owe up to $729,750 on your 1st mortgage;
  • You have a financial hardship and are either delinquent or in danger of falling behind;
  • You have sufficient, documented income to support the modified payment;
  • You must not have been convicted within the last 10 years of felony larceny, theft, fraud or forgery, money laundering or tax evasion, in connection with a mortgage or real estate transaction.

(available at http://www.makinghomeaffordable.gov/programs/lower-payments/Pages/pra.aspx).

Please see the Warnings about Loan Modifications page.  Applying for a government program will not automatically stop a foreclosure.

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