How to Write a Hardship Letter

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A hardship letter explains why a homeowner is defaulting on their mortgage and needs to sell their home for less than what’s owed on the mortgage.

The best letters read like an attorney’s pleading. They establish facts in a way that cause a mortgage lender to decide to either grant a short sale or loan modification. It's always important to be specific about your lack of funds.

What Constitutes Hardship

Hardship circumstances can include the loss of a job, the death of a spouse, a serious medical condition, a divorce, a reduction in pay, transfer, or some other serious change in financial circumstances. But if the lender detects that a homeowner has savings in a distant bank, it may be grounds to request a seller contribution.

That’s because lenders are less interested in protecting the homeowner’s credit score and most interested in recouping the loan, or as much of it as they can. It's important the hardship letter clearly state that granting the request for loan modification or short sale is the best way and only way the lender can 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
  • How the situation cannot be improved and why

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

Banks May Be Unsympathetic

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. Hardship is not a matter of numbers as in this example:

"My home was appraised at $400,000 when I got the mortgage, and now it's valued at $220,000 at best."

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 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

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.

Write simply but evocatively. 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've borrowed $10,000 against my VISA 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 because that statement could affect the bank’s decision to proceed.

Keep in mind if there’s a chance a homeowner will become financially whole again, the lender may jump on it. That’s why homeowners must delete anything optimistic.

Certainly, you can state that:

“I’ve tried other financial avenues and explored every option. Now, though, I’m at the end of the road. Circumstances won't improve. In fact, they will only get worse without assistance.”

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.