How to Write a Hardship Letter

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If you come to the point that you have to consider a short sale, you will need to write a hardship letter to your lender. A hardship letter explains why a homeowner is defaulting on their mortgage and needs to sell their home for less than what’s owed.

The best letters read like an attorney’s pleading. They establish facts in a way as to convince a mortgage lender to grant a short sale or loan modification instead of a foreclosure.

What Constitutes Hardship

Although an underwater mortgage is one of the qualifications for a short sale, a bank is under no obligation to agree when a homeowner’s residence is worth less than the mortgage principal on it. In fact, lenders are famous for being unsympathetic to homeowners who want to walk away or modify loan terms just because the property is no longer worth the amount they paid for it.

Because fraud is punishable, it’s important for a homeowner to assess whether they are truly in a hardship situation. Spell out in the hardship letter the exact circumstances or life changes that make it impossible to meet the payments and to maintain the home given the current rate and mortgage terms.

For example:

  • Unemployment
  • Reduced income caused by furlough, a new job, partner's job loss, or pay cut
  • Illness or medical emergency
  • Voluntary or involuntary job transfer
  • Divorce, separation, or marital difficulties
  • Death of the family’s primary breadwinner
  • Extreme change in mortgage terms, such as an adjustable-rate loan
  • Military service
  • Death in the family
  • Incarceration
  • Increased expenses and excessive debts
  • Unexpected catastrophes necessitating major repairs or maintenance

Ultimately, lenders are less interested in protecting the homeowner’s credit score than in recouping the loan—or as much of it as they can. So It's important that the hardship letter clearly state that granting the request for a loan modification or short sale is the best way for the lender to do that.

Points to Address

Hardship letters are generally no longer than a page and address the following key points:

  • How the current financial situation arose
  • What has changed in the real estate market since the original financing
  • What was done to try to improve the situation
  • Why the situation cannot be improved

Lenders may require supporting documentation such as pay stubs, tax returns, or bank statements to prove that you lack the resources to repay the mortgage in full. It's also a good idea to provide comparable sales from an agent to back up your claim that you can't get enough for your home to cover the costs.

How to Word the Hardship Letter

Being on the brink of bankruptcy or foreclosure is a terrible story, but it’s important information the lender should hear. Share it, as painful as doing so may be. Be succinct when describing the unfortunate events and be specific in describing their impact. Use numbers and percentages to explain the loss of income or negative cash flow.

When listing the amount of money borrowed to pay off the debt in the past, disclose each dollar amount and the source of that debt—whether it’s a loan, cash advance, or credit card—all while painting the worst possible but honest picture. For example:

"I lost my job eight months ago. Since then, I've had to borrow $10,000 against my credit card to make payments over the past six months and I have charged my cards to the max. My car needs a total overhaul. Spiro, the cat, has cancer and vet bills are mounting. The kids are eating nothing but peanut butter sandwiches and my fingernails are worn from scrubbing other people's floors for pennies a day because my elderly mother has moved in with my family and needs round-the-clock medical care.”

Some lenders require an affidavit rather than a letter. An affidavit is a sworn statement and has greater legal consequences if you lie.

Whether it’s an affidavit or a letter, include the following details:

  • Name, address, phone number, date, loan number
  • Short introduction asking for permission to sell your home in a short sale
  • Hardship details and neighborhood comparables
  • Assertion that the only other alternative is foreclosure
  • Statement that you’d like to live up to your financial obligations if you could

Hardship Letter Mistakes

In a nutshell, don’t use the letter as an outlet for anger, bargaining, or to make a political impression. Refrain from criticizing the bank, stating that relatives will loan the money needed, or that a secret account has other funds. Doing so could cause the bank to follow up on these items and require the additional money to complete the sale. Don’t promise things will turn around soon, either, because that statement could affect the bank’s decision to proceed.

Keep in mind, if there’s any sign a homeowner will become financially whole again, the lender may jump on it. Your hardship letter isn't the place for optimism.

It can be depressing to describe in black and white these financially dire circumstances that are personal or embarrassing. Yet doing so gives many homeowners clarity around the downturn that has impacted their lives and leads them to make positive changes for the future.