If you are a homeowner struggling to make payments on your mortgage, you may be considering applying for assistance from your bank to resolve the issue and avoid foreclosure.
Regardless of whether you want to keep your home or to get out of your home (either as an equity sale or a short sale), your lender will ask you to send in a hardship letter as part of the required document package.
Here is a video on how to write a hardship letter that I made:
At the bottom of this post you’ll find two sample hardship letters. But before you jump ahead, be sure to read about what your bank or lender is actually looking for. That way, you can avoid the common mistakes that people make on their hardship letters.
They will also ask you to check a box on your application for assistance indicating what your “hardship reason” was for defaulting on your mortgage.
It may seem like writing your hardship letter and picking a hardship reason isn’t a big deal. But, the lender actually uses the hardship to qualify you for their assistance programs (like loan modifications, repayment plans, short sales and other loss mitigation agreements).
What’s hard is – your lender won’t tell you what they’re looking for within the hardship letter to make you eligible for assistance.
If you don’t know what they’re looking for, you could make a mistake with your letter and unintentionally cause yourself to get denied.
To stand the best shot at getting approved for an assistance option, you need to know what the lender is hoping to see when they read your hardship letter and review your application.
Figure out whether you want to keep or get rid of the home and then send the right message with your hardship letter
Decide whether you want to keep your home or get rid of your home and then get clear on the message your hardship letter should convey:
If you’re trying to keep your home, you want your letter to convey this message:
I experienced a genuine (qualifying) financial hardship that caused me to default on the mortgage but the financial issues surrounding the hardship have been resolved; I am now capable of resuming regular mortgage payments.
If you’re trying to get out of the home, you want your letter to convey this message:
I have experienced and am currently experiencing a financial hardship (an ongoing circumstance) that is not resolved and will not be resolved in the near future. I am not able to resume making mortgage payments.
Use one of the 5 valid reasons for financial hardship so your application gets approved
There are 5 things lenders have deemed as “valid” financial hardships.
Job Loss or Unemployment
This is the most common reason people fall on their mortgage and it’s also the most cut and dry reason to present to the lender. It’s straightforward and understandable that job loss would cause financial hardship.
If you’re someone who has multiple hardships but job loss is one of them, choose this hardship reason to focus on in your letter.
Sometimes, people feel hesitant to tell the banks that they were laid off or fired, thinking that the bank may be less inclined to give them a second chance on their mortgage. They don’t care why you lost your job so don’t feel embarrassed to tell them the truth.
In a divorce, income goes down and expenses go up, as there are now two households to support instead of one.
If you are in a situation where you are on your way to divorce, but you don’t have valid divorce paperwork yet, call it a separation and explain that you are on the path to a divorce.
Death of a Borrower
If you’re a surviving borrower and the other borrower has passed away, explain how the borrower’s death has impacted the ability to pay the mortgage and then attach the death certificate to the back of the hardship letter.
If you’re applying as a personal representative of an estate, your hardship reason will be “death of the borrower.” You should send the legal paperwork (probate documents) along with the hardship letter showing the bank that you have been given legal authority to handle the loan.
Illness of a borrower
Banks accept a broad interpretation of this hardship reason. For purposes of loss mitigation reviews, illness doesn’t just mean a physical illness. Mental illness (or any other issue impacting your health that costs money) counts.
It can feel personal to get into the details of health care issues – not a ton of details are necessary. It is fine to leave the information with the general term of your diagnosis for example:
“In March of 2020, I was diagnosed with severe PTSD.”
Illness of a borrower can also be expanded to include illness of someone else in the household.
If a child, a parent or someone else in the household is ill and the illness has impacted the income, you can use this as a valid hardship reason.
Unforeseen Expenses or Increased Expenses
If you are trying to keep your home, this is definitely the reason that you want to avoid using, if possible.
While banks acknowledge that unforeseen expenses can cause a problem for the household (which is why they include this as an option for hardship), it’s not a great one to use because it may make you appear financially irresponsible.
When you’re trying to keep your home (likely through a loan modification or a repayment plan that will allow you to resume regular payments), your lender wants to know that you are able to meet your expenses and have some extra income left over at the end of every month to provide for unforeseen expenses.
Lenders want to know that you’re not at risk of defaulting again. Using unforeseen expenses as the reason why you defaulted in the first place doesn’t build a lot of confidence in your financial planning skills (even though we all know that unforeseen expenses are a real thing!).
So, if you can slot your financial hardship into some other reason listed above, do that before using this reason.
If you choose to use this reason, make sure you tell the lender that:
- The unforeseen expense is resolved
- You have adjusted your future financial planning skills to account for unforeseen expenses moving forward
It is also worth mentioning that there are some unforeseen expenses that are viewed more favorably by the lender. Valid or “good” unforeseen expenses are things like:
- Home repairs
- Structural issues that impact the durability of the home (e.g. black mold, roof issues)
- A family member or loved one having an emergency issue that required you to spend money (traveling, contributing toward resolving the emergency issue etc.)
- Childcare issues
- Military service, such as being deployed or called up for National Guard service
- Natural disasters in your area
Less persuasive hardship reasons are going to be expenses that you likely should have been prepared for, or discretionary spending for things that aren’t completely necessary like:
- Large purchases like new cars or boats
- Traveling for pleasure
- Casino spending
- Car repairs
- Entertainment costs
Now that you know your overall message and have slotted your hardship into 1 of the 5 valid hardships, you are ready to write your hardship letter. Be sure to write your full name, address and loan number on your hardship letter.
Here are two hardship letter templates:
Example 1 – Keep the Home (repayment plan or loan modification hardship letter)
“In December of 2019, our household income was reduced due to job loss. I was laid off for two months during which time we defaulted on our mortgage. We prioritized daily household expenses for our family during that time.
Now, the income in the household has recovered. I am back to work at this time and we are fully capable of resuming mortgage payments.
I love this home and fully intend to keep it.”
Example 2 – Get out of the home (short sale hardship letter)
“In December of 2019, our household income was reduced due to job loss. I was laid off for two months during which time we defaulted on our mortgage.
At this time, the mortgage payment is unaffordable and the household income has not recovered.
I would like to avoid foreclosure and complete a short sale of the home.”
If you are a Washington homeowner and have questions about how to present your hardship information in the most persuasive way – or would like help with loss mitigation solutions such as avoiding foreclosure, selling your home short, getting a loan modification, or looking at other avenues of debt and mortgage relief, give me a call at (425) 654-1674.
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