What is “job loss/reduction of income”?
Job loss/reduction of income 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 have a valid financial hardship.
Lenders view loan modifications as “2nd chances” to make mortgage payments.
Lenders want to offer loan modifications to people who experienced unavoidable and serious financial hardship that made it impossible to stay current on mortgage payments.
The main government-backed investors (FHA, VA, Fannie Mae, Freddie Mac, and USDA) have identified “job loss / reduction in income” as one of 5 valid financial hardship.
The 5 Hardship Reasons:
- Job Loss / Reduction in Income
- Illness of Borrower (Medical Expenses)
- Death of Borrower
- Divorce / Separation
- Unforeseen Expenses
What does job loss mean?
Obviously, if you are laid off from your job and need to find another job, this qualifies as job loss.
But job loss (for the purposes of a loss mitigation) gets interpreted broadly.
Things that also qualify as job loss are:
- Reduction of hours at work
- Transfer to a new position that has a lower rate of pay
- Removal or reduction in bonus or commission structure
- Taking a period of unpaid maternity or paternity leave
- Business closure for self-employed people (most commonly right now, closures due to COVID-19)
If you were fired from your job, this also counts as job loss.
You should not feel embarrassed to tell your lender that you were fired.
The mortgage lender is not judging you – they are simply trying to confirm that you experienced an event that impacted the household income in a genuine way and getting fired definitely qualifies.
What does reduction of income mean?
“Reduction of Income” is connected to job loss as a way for people who do not have job-related income to report a loss of income.
Things that classify as reduction of income:
- Loss of pension, SSI, disability benefits or other kinds of benefits that were supplementing the household income
- Loss of a household contributor’s income
- Loss of foster-child or adopted-child government stipends
- Loss of rental or boarder income
- Loss of vacation rental (AirBnb) income due to issues outside your control (e.g. government mandates for COVID-19 closures)
Job loss (or reduction in income) is the best hardship reason
Of the five main hardship reasons listed above, job loss and/or reduction in income is the best hardship reason to use for a loss mitigation application because it’s the most straightforward.
If you have income coming in and the income goes away, this is easy to explain and to understand.
If you’re someone who has multiple qualifying hardships happening at one time (which is common), choose job loss as the hardship reason to focus on during the application process because it will get your review through the hardship validation process smoothly and quickly.
What to include in your hardship letter for the “job loss” hardship
- The date of your job loss (or reduction in income)
- The nature of the job loss or reduction in income (what happened)
- If the job loss occurred more than one month prior to your default date, tell the lender how the job loss eventually impacted your ability to pay the mortgage (so it’s clear that the job loss was the cause)
- That the job loss forced you prioritize daily living expenses over the mortgage payment
This is when you need to state that the income has recovered
If you’re applying for a modification, make sure to state that the income has recovered and the job loss is over
While financial hardship is a required part of the modification process, in order to actually get approved for a modification, mortgage lenders need to know that the hardship is over.
When you write your hardship letter and you mention your job loss, include a sentence at the end of your hardship letter telling the lender that your hardship has been resolved.
Explain to them how the hardship is resolved.
Example: In January of 2020, I found new employment at a company where I make the same salary I was making previously. The income has recovered and we are fully able to resume making mortgage payments.
Learn how to write the most effective hardship letter.
This is when you don’t need to state that the income has recovered
If you’re applying for a loss mitigation option like a short sale or a deed in lieu of foreclosure, you are asking the lender to let you out of your mortgage, relinquish the property and settle any remaining balance you owe.
In this situation, it is good to show the lender that there is no recovery to the household income and that future recovery is impossible.
To get approved for these options, tell the lender that the financial hardship you experienced from your job loss (or reduction in income) is permanent.
Example: The end of my pension benefits is permanent. I will no longer be receiving these funds in the future.
Example: The job I used to perform no longer exists as my company eliminated the department. I am re-employed at a different job but the pay is half as much as what I used to make and I am not expecting it to increase.
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 how to present your financial hardship, feel free to give me a call at (425) 654-1674.
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