Bank of America principal reduction program.

Bank of America has initiated a new "earned principal forgiveness" program that will in effect lower the amount of principal that homeowners need to repay on their mortgages. This program will help some of its most troubled mortgage borrowers, including those former Countrywide customers. Bank of America will forgive up to 30 percent of some customers' loan principal.

This new service, which will begin in May 2010, is among the first by a major U.S. bank or mortgage lender that takes a consistent, systematic, and innovative approach to reducing mortgage principal when home values drop well below the amount owed on their mortgage. This will be a tremendous benefit to some of the hardest hit parts of the country. After all, the primary goal is to prevent foreclosures among struggling homeowners. Dial 1.800.846.2222 to learn more on principal reduction.

What are the terms of the BOA principal reduction program

The lender will start forgiving principal for homeowners who owe more than 120 percent of their home's value. Some of the other details include the following:

  • Bank of America will begin by offering an earned principal forgiveness of up to 30% of the loans value. This first stage will in effect reduce the loan value to 100% over five years. This is what is known as principal forgiveness, and it will occur in a two-stage process.
    • During the first stage, a portion of the homeowners principal that will end up being forgiven will be set aside as an interest-free forbearance of principal account.
    • Then during the second stage, which will occur over 5 years, more program benefits kick in. Additional assistance will be provided over a five-year period during which the homeowner must stay current on his or her monthly mortgage payments.

At the conclusion of the five year period, and if the customer made all of their payments on time, the principal that has been set-aside per stage two above will be forgiven. On some mortgages that are in danger of imminent default the lender may cut principal to as low as 95%, so this will benefit the homeowner even more.





How does Bank of America principal reduction work?

Here is an example. Say a homeowner owes $500,000 on a home whose value has fallen to $400,000 due to the national housing crisis. Now one hundred thousand dollars of that balance would be moved into a special interest-free account that is established by Bank of America.

The customer needs to stay current on that new mortgage. As long as the owner of the home continues to make monthly payments on the $400,000, (which is the new balance), a total of $20,000 in the special account would be forgiven each year as part of the principal reduction program. This will occur each and every year until either the balance was zero or the housing market had recovered and the borrower once again had positive equity in their home.

Going forward, Bank of America will make principal reduction and this service one of the main assistance programs that they offer qualifying customers. They will implement this program toward reaching the federal government HAMP's target for an affordable monthly payment that is equal to 31 percent of household income when modifying qualifying Pay-Option ARM, subprime, and prime two-year hybrid ARM loans that are also eligible for NHRP.

After a successful reduction of a homeowners principal, further aid may be offered in the form of an interest rate reduction, forbearance, or other steps. The goal of Bank of America is to offer as many options as possible to homeowners who may need a little support to get back on their feet.





By Jon McNamara

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