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 mortgage holder is defaulting on their loan and needs to sell their home for less than what they owe.
The best letter reads like a lawyer’s pleading. It establishes facts in such a way as to convince your mortgage lender to grant a short sale or a loan modification instead of foreclosing.
- A hardship letter explains why a mortgage holder is defaulting on their loan and needs to sell their home for less than what they owe.
- Hardship may arise from unemployment, reduced income, a death in the family, divorce, military service, incarceration, or other situations.
- Hardship letters generally address how the current financial situation arose, how the real estate market has changed, what you have done to try to improve your situation, and why it can't be further improved.
- Do not use the letter as an outlet for anger or to try to make a bargain or a political statement.
What Constitutes Hardship?
Although an underwater mortgage is one of the qualifications for a short sale, a bank is under no obligation to agree with you when you assert your home is worth less than the mortgage balance on it. In fact, lenders are likely to be opposed to mortgage holders who want to walk away from their home or modify loan terms just because the property is no longer worth the amount they paid for it.
Because fraud is punishable under law, it is important for you to assess whether you 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 mortgage rate and terms.
Here are some types of hardships that might help you get your short sale approved:
- Reduced income caused by a furlough, a new job, your partner's job loss, or a pay cut
- An illness or other medical emergency
- A job transfer
- A divorce or separation from your spouse
- A death in the family, particularly the family’s primary earner
- An extreme change in mortgage terms, such as for an adjustable-rate loan
- Military service
- Increased expenses and excessive debts
- A need for major repairs or maintenance on the home
Lenders are far less interested in protecting your credit score than in recouping their loan—or as much of it as they can. So your hardship letter must clearly state that granting the request for a loan modification or short sale is the best way for the lender to be able to do that.
Points to Address
Hardship letters are often no longer than a page. They should address all of the following key points:
- How the current financial situation arose
- What has changed in the real estate market since the original financing
- What you have done to try to improve your situation
- Why it cannot be further improved
Lenders may require documentation such as pay stubs, tax returns, or bank statements to prove that you lack the resources to repay the mortgage in full. It is 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 to have to tell, but it’s vital the lender hears your story. Share it, as painful as doing so may be. Be to the point when describing the events that have caused you hardship and be specific in describing their impact. Use dollar figures 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 have had to borrow $10,000 against my credit cards to make payments, and I have charged my cards to the max. My car needs a total overhaul. Our cat Spiro had cancer, and we owe the vet $3,000. The kids are eating nothing but peanut butter sandwiches, and my fingernails are worn from scrubbing other people's floors to make some income while I find a better job. My elderly mother has also moved in with my family and needs constant 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; a short introduction asking for permission to sell your home in a short sale; hardship details and neighborhood comparable sale prices; assertion that the only other alternative is foreclosure; and a statement that you would like to live up to your financial obligations if you could.
Hardship Letter Mistakes
Do not use the letter as an outlet for anger or to try to make a bargain or a political statement. Refrain from criticizing the bank, stating that relatives will loan the money needed, or suggesting that you have a secret account with other funds. Doing so could cause the bank to follow up on these items and require the additional money to complete the sale.
Do not promise things will turn around soon, either, because that is a good reason for the bank to turn you down. Keep in mind that if there’s any sign a homeowner will become financially whole again, the lender will jump on it.
Your hardship letter is not the place for optimism.
The Bottom Line
It may be depressing to describe your financially dire circumstances. And you may feel like having to explain your hardships to a lender is an invasion of your privacy.
Still, writing your hardship letter can give you clarity around the downturn that has impacted your life and may lead you to be able to make positive changes for the future.