The Hardship Letter: Four Points to Make When Seeking a Home Loan Modification or Short Sale

foreclosure sign - home loan modificationMany a homeowner has been "inspired" to do-it-yourself-dom by a traumatic encounter with a bad contractor (traumatic to the psyche -- or the pocketbook). In the same vein, the spate of loan modification scammers who have taken thousands from already struggling homeowners in return for false promises to fix their broken adjustable rate mortgages (ARMs), get their principal balances slashed and even save long-defaulted, deeply underwater homes from the foreclosure auction block has served as inspiration for many a homeowner to go the loan mod route themselves.Even the free-to-owner, reputable loan mod programs, like the Neighborhood Assistance Corporation of America's (NACA's) Home Save Program, and the free-to-owner short sale listing agents will ask homeowners to DIY when it comes to putting together a document they perceive as the linchpin -- or weak link -- of a loan workout application: the hardship letter.

And even the savviest homeowner often faces the task of writing a hardship letter like a desperate deer in the headlights, their total uncertainty as to what to write causes nearly as much intimidation and fear as the sky-high stakes of the letter itself.

If you've been asked to submit a hardship letter to your mortgage servicer to support your application for a loan modification or a short sale, first understand that you can't completely "win" your loan mod or short sale in your hardship letter alone. Your lender will pore over your financials, the property's value, and their own guidelines before granting you the relief you seek.

But you can "lose" it in your letter -- sentences like "I can't afford to spend my last $50,000 of savings and the last $300,000 in my 401K to make my mortgage payments" let your lender know that your definition of hardship and theirs definitely are not the same. This sort of hardship letter statement also signals to your lender that you do have the resources to make up the deficiency between your home's sale price and your mortgage balances, for example, if you are requesting short sale approval.

With that said, there are four critical elements you should definitely include in your hardship letter, if you're applying for a loan modification or a short sale from your lender:

1. The Nature and Duration of your Hardship

Did you or your spouse lose your job? Were you forced to take time off of work during a long illness? All of the above? (If you've had a multitude of trials in recent times, sharing them all helps.)

Are you back to work, or not? If you're trying to get a loan modification, including a reinstatement of a mortgage on which you've missed payments, your lender will want documentation that you truly had a hardship, and that you now have a consistent income high enough to make your modified payments. If you aren't back to work, and you're looking for a short sale, let the lender know that you have no income.

And fyi -- the fact that your home is upside down (i.e., you owe more on it than it's worth) is not, alone, considered a significant hardship by most mortgage servicers.

2. Keyword: Bankruptcy

I've actually had mortgage collectors tell me that a borrower simply uttering the word "bankruptcy" opens a set of new options the collectors are authorized to offer. Why? Well, if a borrower files bankruptcy, the court will freeze any foreclosure or collection proceedings, at least temporarily, and may even completely "strip" second or third mortgages. Long story short, mentioning that you are considering or are on the verge of filing bankruptcy, but would really prefer to avoid it via the short sale or loan modification for which you are applying, may actually shift some factors in your favor.

3. All the Names and Numbers

In your hardship letter, you will need the legal names of all borrowers (as they appear on the mortgage account), contact information, the property address, and loan account number. Yes, this seems like a given. But when your home is on the line and emotions are high, it can be easy to make a basic, but deal-killing omission like this -- especially if you are truly doing-it-yourself. Loss mitigation staffers are notorious for losing individual documents and even whole application packages -- make sure that if your letter gets separated from your tax returns or other documents, it can still be connected to your account. And it's not overkill to put your name and loan account number on every page of the letter.

4. Your Goal

Respectfully, clearly state what relief you seek. Are you on a mission to keep your home, or are you desperate to sell it, even at a loss? Are you looking for them to reduce your mortgage payment to a particular dollar amount, or to reduce your principal balance? (Heads up: this is unlikely to happen, but it never hurts to ask.) Are you willing to pay the full, existing payment, so long as they can reinstate your defaulted loan without requiring you to make all the back payments this moment?

With mortgage lenders, it's not quite as simple as "ask-and-ye-shall-receive. But clarity about what you seek does increase the chances that you'll get at least that, versus receiving an offer of something that seems like a solution to your servicer but doesn't truly address your personal financial situation or your family's needs.
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