Loan Modification Hardship Reason # 5: Unforeseen Expenses

What is an unforeseen expense?

An unforeseen expense is one of the five valid hardships that qualify you for a loan modification. It is a bit of a catchall, or overflow category. You use it when your hardship doesn’t fit into one of the other four categories.

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:

1. Job Loss / Reduction in Income
2. Illness of Borrower (Medical Expenses)
3. Death of Borrower
4. Divorce / Separation
5. 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 “unforeseen expenses.”

Don’t use “unforeseen expenses” as your hardship reason unless it’s your only option

Lenders also want to know that you are not at risk of defaulting again if they give you a loan modification. Using “unforeseen expenses” as your hardship reason can be a little bit tricky because you don’t want the lender to think that there was a money-management issue that led to the default.

Therefore, if your hardship was originally from an illness, or medical expenses, or death or divorce, you’ll want to use those hardship categories.

You may have had a wide variety of unforeseen expenses occur after a divorce or illness, but you still don’t want to use unforeseen expenses as your category. Always use the original cause if possible.

Your unforeseen expenses should be:

• Large: You don’t want to tell the lender that your unforeseen expense that caused you to miss mortgage payments was relatively small. The lender expects you to be able to cover smaller, unforeseen expenses without missing mortgage payments so make sure your expenses are large (generally – they should be more than $500 at a minimum).

• Unpredictable: Make it clear to the lender why you did not anticipate the expense popping up.

Common examples of valid unforeseen expenses:

• Structural repairs to the home (roof issues, flooding, black mold etc.)

• Sudden travel costs related to family-member care (most commonly, a parent or elderly family member becomes ill unexpectedly and then, there are unforeseen costs associated with this)

• Costs related to childcare (if a child suddenly cannot attend school or pre-school and you have to pay for them to be cared for in some other manner so you can maintain your employment)

• Sudden necessary replacement of a big item (car, furnace, roof etc.)

Common examples of unforeseen expenses that you should avoid using are:

• Discretionary spending (shopping, eating out, entertainment, travel for pleasure etc)

• Repairs for smaller items (car repairs under $500)

Sometimes, you have several smaller, unforeseen expenses that add up to one large expense

Sometimes, several smaller unforeseen expenses all compound at the same time and create one large, unforeseen expense.

If this has happened to you, make sure you outline ALL the expenses and tell the lender the TOTAL COST for all expenses so they can truly see how big of an impact it had on the household income.

Learn how to present your income and expenses on a loan modification application

Include these things in your hardship letter for an “unforeseen expense” hardship:

If you’re using unforeseen expenses as your hardship reason, don’t just say you had “unforeseen expenses.”

• Outline in list form what the expenses were and the cost of each expense

• Then, tell the lender why they were “unforeseen” or why you could not predict the expense

• Total the expenses at the bottom of the list to help the lender see the total cost of all the unforeseen expenses.

• After the total, tell the lender that the expenses have been taken care of and are no longer an issue. Use the phrase “the household expenses have stabilized.”

• Tell the lender your plan to account for future unforeseen expenses without defaulting on your mortgage again

Attach supporting documentation to your hardship letter

Supporting documentation is not necessary in order for your hardship to be approved.

However, if you’re relying on “unforeseen expenses” as your hardship reason, it is a good idea to submit supporting documentation, if you can.

Examples of good supporting documentation:

• Repair contractor invoices for repairs to the home
• Highlighted expenses on your bank statements related to your hardship
• Invoices from an auto-mechanic to substantiate car repairs
• Invoices / receipts from any plane flights or other travel expenses (hotel costs) etc.

If you attach supporting documentation, make sure to point the lender’s attention to the documentation in your hardship letter.

Label the supporting documentation at the top of each page, telling the lender which expense the documentation supports.

Example: “SUPPORTING DOCUMENTATION FOR ROOF REPAIR COST OF $4,500.”

Learn how to write a letter of explanation for a loan modification

Unforeseen Expense Hardship Letter Example

Date (month, day, year)
Borrower Name(s):
Loan Number:
Property Address:

Re: Hardship Letter

Dear ________(lender name):

Please accept this hardship letter.

In _______(month / year), my household experienced two unforeseen household expenses that we were forced to prioritize:

1: We found black mold in our basement. We had a black mold specialist come to the house and discovered that the mold had spread throughout the entire ground floor, threatening my family’s health and well being. This cost us $4,000 to resolve.

2: We suddenly experienced structural issues to our roof that required immediate repairs. As this was required in order for our home to remain habitable, we had to pay for roof repairs immediately. This cost us $8,000 to repair.

The total cost of the unforeseen expenses was $12,000. Invoices for both repairs are attached.

As you can see, these expenses caused us to default on our mortgage. At this time, all expenses have been paid and the household income has stabilized.

We are able to resume making regular mortgage payments at this time and have started a savings account to save 10% of our monthly income each month in order to account for future unforeseen expenses.

Sincerely,

Borrower Name

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.