Writing a Hardship Letter as Part of Your Foreclosure Defense

If you want to avoid foreclosure with a short sale, deed in lieu, or loan modification, you'll need to write a hardship letter to your mortgage lender.

When applying for a loan modification, short sale, or deed in lieu of foreclosure (collectively referred to as forms of “loss mitigation”), one of the requirements in some cases will be for you to write a hardship letter. (In other instances, you will just need to fill out a hardship affidavit.) The hardship letter is part of the loss mitigation application process and is something you must provide along with pay stubs, tax returns, a financial statement, bank statements, and the other information your lender will request. The hardship letter gives the lender a clear picture of your current financial situation and explains the circumstances that have led to your financial difficulties.

What is a “Hardship”?

A hardship is a circumstance that is beyond your control that has resulted in a situation where you can no longer afford to make your current mortgage payments. Hardships that quality for loss mitigation consideration include, for example:

  • Job loss or a reduction in pay
  • Illness of homeowner or family member
  • Medical expenses
  • Divorce or separation
  • Adjustable interest rate reset
  • Military service, and
  • Natural disaster.

What to Include in a Hardship Letter

Many people make the mistake of spending very little time thinking about and drafting their hardship letter or, even worse, they simply copy a sample letter off the Internet. Since the loss mitigation representative who will review your file has most likely read literally hundreds of these letters, it is imperative that your letter be genuine. The best hardship letters don’t use a template or use templates only as a starting point but also include personal, honest information. This does not mean that you need to write a lengthy sob story, but it does require that you be forthright about your situation. In fact, the letter should not to exceed one page so that the reader does not lose interest.

The intent of the hardship letter is to explain to the lender how you got into your current situation and how they can help you avoid foreclosure. State your goal upfront by beginning with a sentence that includes the purpose of your letter. For example, “I would like a loan modification to reduce my interest rate.” Then state the hardship that has led you to fall behind on your mortgage payments. Next, describe the hardship in more detail. That is, explain to the lender how you got into the situation and why it was out of your control. To end your letter, let the lender know that you want to live up to your financial obligations. In the case of a loan modification, let the lender know you intend on making regular payments once the loan has been modified. If you are seeking a short sale or deed in lieu of foreclosure, state that you want to honor your financial obligation but that it has become impossible to do so and a short sale or deed in lieu of foreclosure is the best option for both you and your lender to prevent a foreclosure.

Things to Note Regarding Loan Modifications

The importance of the hardship letter varies some depending on what type of loss mitigation you are seeking. With a short sale, the main thing the lender will look at is whether or not the amount they will receive in the short sale is as much as or more than they expect to get from selling the property following a foreclosure. The likelihood of being granted a deed in lieu of foreclosure primarily depends on whether or not there are other liens on the property. (If there are multiple liens, a deed in lieu of foreclosure will likely not be granted.) For these options, you just need to provide a simple letter that lays out the basics of your hardship. However, if you are seeking a loan modification, the hardship letter is more important.

When writing a hardship letter for a loan modification, keep in mind that the lender’s number one objective is to receive a steady stream of mortgage payments. The lender wants to know whether a loan modification will ensure that you will be able to make your house payment on time in the future. You will need to demonstrate that if the loan is modified, payments will continue uninterrupted. Do this by providing the lender with your plan to get back on track with your payments, and show your lender that you will be able to continue to make your modified monthly payments. When asking for a loan modification, it is a good idea to let the lender know that you have reduced your discretionary spending and have eliminated unnecessary expenses, such as cable television, eating out, and taking vacations. The lender will require that you make some sacrifices and the hardship letter is a good place to demonstrate that you have done that.

There is a fine line to walk when composing a hardship letter for a loan modification. You must show that you are in financial crisis without looking like a lost cause. Often, people who are given loan modifications go into default again, and lenders do not want to go through the trouble of modifying a loan if they will have to foreclose anyway in the end. The lender’s number one goal is to continue to receive on-time mortgage payments, and they need to know that if they modify your loan then that is exactly what will happen.

See Steps to Getting a Loan Modification for more information on hardships and other important considerations.

What Lenders Want

A well-written, concise, and deliberately thought-out hardship letter works best. Just state the facts that are relevant to making your case. Most importantly, do not imply that your situation is your lender’s fault or tell them that their employees are difficult. Also, do not threaten to walk away from the property if you are not given what you want. Ultimately, the lender wants to know that you are motivated to come up with a solution that works for everyone. If you are able to show that everyone will benefit as a result of the loss mitigation, it is much more likely that you will be offered a loan modification, short sale, or deed in lieu of foreclosure.

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