How to Write a Hardship Letter

A Hardship Letter for a Short Sale is a letter that you write to your bank or financial institution requesting that the bank consider a short sale to stop the foreclosure of your home.

In the letter you must:

  • State the legitimate, special circumstances which have caused you to fall behind on your house payments.
  • Explain your current situation and what you are doing to try and get back on your feet.
  • Don’t make your situation worse, by complaining to them.
  • Be honest and represent the facts clearly.

It is important that you put some effort into writing the hardship letter. A lender will agree to a short sale only when they are convinced that a loss on the property is inevitable. The lender then weighs the cost/benefit of a short sale versus a foreclosure.

 

To qualify for a short sale, the borrower must demonstrate evidence that the mortgage cannot be paid and that the property cannot be sold for what is owed on the property. Although short sale applications are assessed on a case by case basis, short sale approval is easier to obtain from a lender if the following conditions exist:

  • The market value of the property has decreased.
  • The borrower has experienced a financial hardship.
  • The mortgage is in default.

What Does The Bank Consider a "Hardship?"

Banks will read the hardship letter to assess why a borrower is having financial difficulties. What situation triggered the problem? When did the problem arise? How has the borrower attempted to cope with the resulting financial difficulties?

 

The underlying reason behind most delinquent mortgage payments is what the mortgage industry defines as a "hardship condition." A hardship is an unexpected financial crisis of some sort. Although it is the lender who ultimately determines whether a situation will be deemed a "hardship," HUD guidelines may help determine status. HUD recognizes the following situations as valid hardships and justification for default:

  • Death of principal mortgagor
  • Death of mortgagor's family member
  • Illness of principal mortgagor
  • Illness of mortgagor's family member
  • Marital difficulties
  • Curtailment of income
  • Unemployment
  • Excessive obligations
  • Inability to sell property
  • Job Relocation
  • Property problem (roof leaks, construction litigation, etc.)
  • Incarceration
  • Inability to rent property
  • Military Service
  • Casualty loss (such as a Hurricane, etc.)
  • Energy-Environmental costs
  • Servicing problems
  • Payment adjustment (ARM Adjusting)
  • Payment dispute
  • Transfer of ownership pending
  • Fraud
  • Abandonment of property (due to condition of property, for instance)

It is important to keep in mind that some scenarios may meet these criteria and yet not be viewed favorably by a lender. Additionally, the more proof of the hardship which a borrower is able to produce, the better.

 

Hardship Analysis

 

Basically, the two questions a lender asks itself when reviewing a short sale packet are:

1) Is this property going to go into foreclosure?

2) If this property goes into foreclosure, will we lose less money with a short sale?

 

Even if the hardship does not completely meet the criteria of a true hardship, the lender may approve the short sale because they believe that the property is going to go into foreclosure regardless.

 

NOTE: As you write the hardship letter, you need to accomplish two goals. You MUST:

 

1) Provide as much written explanation of your hardship as possible. Be specific.

2) Convince the bank that you are unable to make any more payments

The borrower should write the letter in their own words, but they need to make sure that there is a clear picture of their financial condition, and back up their claims to hardship with documentation, such as pay stubs, medical bills, job layoff letters and more. The numbers should clearly illustrate that the borrower is headed for foreclosure or bankruptcy. This will motivate the lender to cooperate.

Lenders are all about numbers, so the letter isn't a sob story about the borrower's difficulties. It should be a factual description of a financial situation that is leading up to a bankruptcy or a foreclosure on their home, or both. The lender must be convinced that their only other option is foreclosure, and then they can analyze the numbers to see if a short sale is a preferable alternative.

The short sale hardship letter can be typed or handwritten, but we have found that typed is most effective and easiest to read. It should contain some standard elements at the top of the letter including the name of the borrower(s), the date, the lender and the loan number. The end of the document should have the borrower’s signature with the date, as well as the signature of any co-borrower. The length is not important so make it as long as needed to have the desired impact.

After assembling hundreds of short sale packages we have found that more than any other document, the hardship letter can help make or break a short sale. While banks care most about dollars and cents, it is important to remember that the package will be reviewed by an individual loss mitigator. Like the rest of us, this loss mitigator is a real person with real emotions who cannot help but be influenced by a sincere story of hardship.