What is “illness of the borrower”?
Illness of the borrower (sometimes known as “medical expenses”) is one of the five valid hardships that qualify you for a loan modification.
Why is identifying a hardship a required part of a loan modification?
Part of the loan modification process includes proving to your mortgage lender that you had a valid financial hardship and that the financial hardship caused you to miss payments on your mortgage.
Lenders view loan modifications as “2nd chances” to make mortgage payments so they want to make sure that you defaulted based on legitimate financial hardship.
Lenders want to offer loan modifications to people who experienced unavoidable and serious financial hardship.
The main government-backed investors (FHA, VA, Fannie Mae, Freddie Mac, and USDA) have identified the 5 valid financial hardships below as valid financial hardships to qualify for a loan modification:
- Job Loss / Reduction in Income
- Illness of Borrower (Medical Expenses)
- Death of Borrower
- Divorce / Separation
- Unforeseen Expenses
The purpose of this post is to help you get qualified for a loan modification if the only financial hardship that applies to you is “illness of the borrower” or “medical expenses.”
Mortgage lenders allow a very broad definition to qualify you under this hardship reason
Lenders take a broad interpretation of what qualifies as “Illness of the borrower.” Some lenders have even updated their application forms to read “Illness of the borrower / Medical Expenses” so they can apply the information more broadly.
The most straightforward example of this hardship occurs when you are a borrower on your mortgage and you become ill. Your illness impacts the household income – either by creating large medical expenses that need to be paid or by preventing you from working. As a result of the illness, you start missing mortgage payments.
In addition to the example above, mortgage lenders will allow you to qualify for a loan modification for other related situations including:
- Mental Illness / therapy / psychiatry expenses
- A temporary injury (broken arm / broken leg etc)
- A one-time emergency expense
- Addiction / Drug Treatment expenses
- Moving a parent into a long-term care facility expenses
- Loss of benefits that used to cover medical expenses
You can qualify for a loan modification even if you’re not the party who become ill
The mortgage lenders don’t make this clear on their applications but even if you are not the party who has become ill, if you are responsible for the expenses of that party (most commonly – your children or your parents), it counts as a valid hardship reason.
What to include in your hardship letter for an “illness of borrower” hardship:
If you’re using “illness of the borrower” as your hardship reason, don’t just say you became ill:
- Tell the lender the date the medical hardship being
- Tell the lender the nature of the hardship (you don’t have to get into too much detail here but it is beneficial to give the lender a picture of what you’re experiencing and the severity of the matter)
- Explain to the lender how the illness has impacted the household income (the two options here are usually by creating large expenses or by preventing you from working)
- Explain to the lender why your health insurance hasn’t been able to fully pay for the issues
- Tell the lender what the medical expenses were for and how much the expenses totaled
In your hardship letter, make sure you tell the lender that the hardship has been resolved
Because you’re applying for a loan modification, you’re trying to prove to the lender that you can resume making a regular mortgage payment again and that the financial hardship is over.
So, you need to tell the lender how the expenses caused by the medical issue have been resolved or how the household income has recovered.
Even if your illness is permanent, in order to get approved for a loan modification, you need to explain to the lender why the medical expenses aren’t causing as big of a problem as they were back when you started missing payments.
If the illness is permanent AND the financial hardship related to the illness is permanent, a loan modification may not be the right option for you. You may want to consider options to downsize in order to help save money (like an equity sale, short sale or deed in lieu.
When to choose “job loss or reduction of income” instead
If your illness is related to the “job loss or reduction in income” hardship reason, choose “job loss / reduction in income” as your primary hardship reason.
It is common for the two hardship reasons – illness and job loss – to both be happening at the same time. If you suffered an injury or became sick, this often impacts your ability to work.
These are the common ways that illnesses impact employment:
- You have to take an unpaid leave of absence from work until you recover (reduction in income)
- You have to transition to a different job duty while you recover that pays less (reduction in income)
- You cannot perform the duties of your job and you either voluntarily leave your job or are fired, creating a period of unemployment (job loss)
While you don’t have to choose only one hardship reason to discuss, it’s best to keep things simple so if your medical hardship has impacted your employment, I suggest checking the “job loss / reduction in income” box on your application just to keep things as simple as possible.
“Job Loss / Reduction in Income” is generally viewed by the mortgage lenders as the most straightforward hardship reason to select. It will minimize the possibility of additional questions from the lender about your hardship.
In your hardship letter, feel free to connect your medical expenses with your job loss but mark “job loss” on your application to help things go as smoothly as possible.
Illness of Borrower / Medical Expense Hardship Letter Example
Date (month, day, year)
Re: Hardship Letter
Dear ________(lender name):
Please accept this hardship letter.
In _______(month / year), I experienced a medical hardship.
I was diagnosed with chronic back pain that required lumbar surgery in order to recover. In order to have the operation, I had to take a leave of absence from work. I am a construction worker and the use of my back is required in order to perform the duties of my job.
I used all of my sick leave and then had to take three weeks of unpaid leave with no pay.
Unfortunately, my insurance only covered 45% of the operation and 60% of the necessary pain medication needed to recover. The combination of high medical expenses associated with the surgery and the unpaid leave of absence I was forced to take from work caused me to miss three mortgage payments.
At this time, my back has recovered. I am back to work full time and am on an affordable payment plan for the remaining medical costs associated with my recovery. I am no longer experiencing financial hardship.
Sometimes, your lender causes your default…
Sometimes, the reason you default on your mortgage can be caused by your lender.
Sometimes, they service release (sell) your loan to a new lender which can cause problems in the application of your payments, causing you to fall behind.
Other times, they lose payments in their system and forget to notify you – if you don’t check your bank statement regularly, you may fall behind and not know it until you get a default notice
If something like this is happening to you, you should reach out for help to a professional.
The solution still may be to apply for a loan modification, but you should speak to an attorney to get help regarding how to present your financial hardship.
If you are a Washington state homeowner and have questions about your loan modification application, your hardship, or how to write your hardship letter, please feel free to reach out for a consultation at (425) 654-1674.