What is “Divorce/Separation”?
Divorce/Separation 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
- 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 “divorce/separation.”
Is being separated equal to being divorced?
If you’re contemplating divorce but have not filed yet, for purposes of a loan modification – you are “separated” not “divorced” and you need to explain this to the lender
If you are contemplating divorce, have not filed yet but are living in separate households, you are considered “separated” for purposes of validating your financial hardship.
Living in separate households impacts the household income and is a valid financial hardship; however, if you tell the lender that you’re divorced and they don’t see documentation of the actual divorce, they may reject your hardship.
Be clear with the lender about the status of your separation.
What supporting documentation do you need to have to validate this hardship?
If you’re divorced, attach the following to your loan modification application:
- Your divorce decree signed by the court
- A quit claim deed (if one was executed) showing that one party was removed from the Title of the property
If you’re not legally divorced but are living separately, attach the following to your loan modification application:
- Separate utility bills with each spouse’s name on them; or
- A lease agreement showing that one party is not living in the primary residence
These are the things that should be included in your hardship letter for a “divorce / separation” hardship:
If you’re using “divorce / separation” as your hardship reason, don’t just say that you are separated:
- Tell the lender the date of the separation or divorce and direct them to the supporting documentation you attached
- Tell the lender how the divorce impacted the household finances and why the mortgage fell behind as a result
- Most commonly, spouses have to go from supporting one household to two and this is usually all you have to explain. Sometimes, there are additional costs for one of the parties resulting from the divorce (like child support or family law attorney’s fees) that can be mentioned as part of the financial hardship.
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 divorce are resolved or no longer an issue.
Since you’re applying to keep the home and resume a regular payment, you need to tell the lender how you plan to afford the mortgage payment moving forward since divorce is a permanent situation.
If you are separated but not legally divorced, BOTH parties need to participate in the loan modification process
If both spouses are co-borrowers on a mortgage, just because you’ve separated doesn’t change the legal liability on the underlying mortgage.
If you are living in separate households but are both borrowers on the loan, both parties need to sign the hardship letter and submit their finances as part of the loan modification package.
Note: a legal divorce (in and of itself) also does not change the legal liability on the underlying mortgage.
Read this guide to divorce and loan modifications.
Know what your back-up options are if you cannot afford the home following divorce
Because divorce causes two households, it can be hard for one spouse to keep up on the mortgage payments.
If you are feeling like it will be hard to make mortgage payments, it may be time to look at other loss mitigation options to avoid foreclosure:
- Equity Sale: If your home has equity in it, you can sell your home, fully pay off your mortgage, and receive funds from the proceeds of the sale. An equity sale can free up some cash so you have money to relocate to a more affordable situation.
- Short Sale: A short sale allows you to sell an underwater property for less than what is owed on the mortgage. Your mortgage lender approves the sale and then typically waives the deficiency balance (the remaining amount owed) so you can sell your home and move on without owing the remaining balance.
- Deed in Lieu of Foreclosure: A deed in lieu of foreclosure is an agreement between yourself and your mortgage lender where you sign a document giving the house back to the bank in exchange for the bank agreeing not to foreclose on you.
- Foreclosure Mediation: Foreclosure mediation in the State of Washington can protect you from foreclosure and help you speak directly to your bank about your alternatives to foreclosure.
Divorce / Separation Hardship Letter Example
Date (month, day, year)
Re: Hardship Letter
Dear ________(lender name):
Please accept this hardship letter.
In _______(month / year), I got divorced. Please see the attached divorce decree and quit claim deed.
We had several expenses related to the divorce proceedings that impacted my ability to pay the mortgage and we defaulted on the loan.
At this time, the divorce is finalized. I was awarded the property and I am bringing in enough income on a monthly basis to afford the mortgage myself. I am receiving my W-2 income and a child support payment every month from my ex-spouse that has increased my monthly income.
I am ready to resume making regular mortgage payments.
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.