Steps to Get Your Mortgage Loan Modified: Part III

Here's the information your lender is looking for when you are trying to show a hardship in a loan modification application.

Unsure what hardship to include in your hardship letter or whether you even suffered a hardship? You may have suffered a hardship without even realizing it. Talk with your spouse, business associates, lawyer, or accountant, and make a list of all applicable hardships. Reconstruct the series of events which, together, have left you in the financial situation you are currently in.

Common Types of Hardship

There are certain common hardships that lenders have accepted as valid reasons to approve a loan modification application. Some of the most common are listed below, but the list is by no means comprehensive. Your hardship may be one of those listed, but it may not. Or you may have suffered multiple hardships. Describe all of your hardships truthfully and in detail in your hardship letter.

  • Payment shock. Your mortgage payment went up. You never realized that your payments would adjust to the amount that they have reached. Or you could not reasonably foresee the catastrophic economic effects of  the mortgage crisis on the economy: that your home value would fall so much, eliminating the possibility of refinance, and that you would lose so much  income as a direct result of  the severe economic depression in your business community due to the real estate collapse and its far-reaching effects on lending, liquidity, and commerce generally.

  • Job loss, work cutbacks, or pay reductions. Be sure to include your spouse and any person who normally contributes to your monthly household income. Review your pay stubs and hours worked. Gather any and all memos or notices received from your employer or employers. Carefully note income declines over the last  two to three  years and the events which caused the declines.

  • Underemployment. Underemployment occurs when your new job pays less than your  old one. For example, you once had your own auto dealership, but you now work part-time at Wal-Mart and 7-11, and your wife babysits in your home. With underemployment, you have the ability to pay but an amount that is less than your normal mortgage payment.  That’s all your lender needs--proof of income reasonably likely to sustain a regular monthly payment of a lower dollar amount. In this situation, your lender is likely better off modifying than foreclosing.

  • Declining business or sales revenue. This type of hardship applies if your income has decreased and you own your own business; are self-employed; work for commissions, bonuses, or tips; or earn income in any way other than as a company employee receiving a regular paycheck.

  • Illness or injury. Cancer, a heart attack, suicide, stroke, increased symptoms of diabetes, Alzheimer's disease, and other illnesses can constitute a hardship.

  • Divorce or separation. Divorce is a financial wipeout. If you went through a divorce or separated from your spouse, you have definitely experienced financial hardship. (See Avoiding Foreclosure During Divorce for related information and tips.)

  • Disaster. This includes fires, auto accidents, floods, or any act of God, whether insured, uninsured, or partially insured. These are setbacks to your cash flow and are valid hardships.

  • Incarceration or other legal problems. If you or  your spouse, child, or loved one was imprisoned or involved in costly criminal or civil litigation, the financial effect is often extreme. This is a valid hardship.

When to Seek Legal Counsel

There are many legal options available for people who are struggling with a hefty mortgage, credit card debt, medical bills, etc. Whether it's foreclosure defense, debt settlement, or another financial solution, you may want to seek the help of an attorney for advice and various legal strategies for dealing with your financial situation. Another thing to consider is filing for bankruptcy. Check out our section on bankruptcy and foreclosure to find out more.

Previous: To review the basic criteria that lenders look for in loan modification candidates, and options to consider if a loan modification request fails, go back and read Steps to Get a Loan Modification: Part I. For a list of the documents you will need to submit as part of your loan modification application and the elements you will need to include in your hardship letter, read part 2 of this series.

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