Simply put: a Principal Reduction Program is a program that reduces the principal on your mortgage to your home's current market value
. Through a Principal Reduction Program your lender forgives the current negative equity on your mortgage. This is made possible through the cooperative effort of private investors and funds from the federal government's Troubled Asset Relief Program ("TARP"). Once enrolled in a Principal Reduction Program, your loan is pooled with other loans from your lender. The negotiators for the private investment group offer to purchase the pool of loans from the lender at a reduced price. The lender is then able to access the government TARP funds to recoup up to 85% of the value of the mortgages. Your mortgage is now serviced by the investors. Once purchasing the loan, the investment group secures you with a new loan at the current market value, reducing the principal on your mortgage and eliminating negative equity. The investors are able to purchase the loan at twenty to thirty cents on the dollar, enabling them to reduce your loan value while still profiting from the transaction themselves. At the end of the day it is a win-win situation all around: The lender collects exponentially more on the loan than it would through a foreclosure or short sale and opens its books for better performing debt. The private investors profit from procuring the loans at a discounted rate and obtaining servicing rights on the loans that they purchase. You are the biggest winner being able to reduce the principal on your mortgage to what your home is actually worth and eliminating negative equity without impacting your credit rating How do I get in a Principal Reduction Program? To qualify for a Principal Reduction Program, a homeowner must have: Negative equity in his/her home (owe more than the home is worth) Documented income A debt-to-income ratio of 50% or less Qualification basically depends on the homeowner's ability to pay the new mortgage.