Lenders have just about heard it all when it comes to why folks haven't been able to pay their mortgages. The truth is, a good hardship letter can make all the difference between getting a mortgage modification (also called a "restructure") and not getting approved for one.
(For those of you that may be unfamiliar with the purpose of a Hardship Letter, it's to explain to the lender why you have fallen behind on your mortgage payments and why you should be given the chance to have your loan modified/restructured).
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In this article we're going to discuss the five main reasons for hardship and five essentials for writing an effective hardship letter.
Reasons for Financial Hardship:
Assuming we're all on the same page with what it means to have a financial hardship (e.g. you're not even coming close to being able to afford your mortgage and at the same time put food on the table), let's go over what lenders consider to be the five main "acceptable explanations for hardship".
1. Loss or Reduction in Income:
A reduction in income could be because of a loss of employment, reduced job hours, reduced pay, or a decline in self-employed business earnings.
2. Household Financial Circumstances Have Changed:>/b>
Perhaps there has been a death in family, a serious or chronic illness or permanent or short-term disability that has affected either one of the primary wage earners or their dependents, increased family responsibility (such as adoption or birth of a child or taking care of elderly relatives/other family members).
3. Cash Reserves are Insufficient to Maintain the Payment on Your Mortgage Loan and Cover Basic Living Expenses at the same time:
You may have depleted all of your cash reserves in order to pay the mortgage and cover basic living costs. Cash reserves include assets such as cash, savings, money market funds, marketable stocks or bonds (excluding retirement accounts) but do not include assets that serve as an emergency fund (generally equal to three times monthly debt payments).
4. Monthly Debt Payments Are Excessive / Overextended with Creditors:
If you're like many of us, you may have used credit cards, home equity loans or other credit to make monthly mortgage payments or pay other essential bills and have now maxed out all of your available sources of credit. Another reason is that perhaps your ARM (adjustable rate mortgage) has gone up excessively and now you are no longer able to make the payments.
5. There are other reasons why it's impossible to make the mortgage payments:
There could be many other reasons, such as the incarceration of one of the borrowers, or a personal family tragedy that has made it impossible to make the mortgage payments.
Reviewing these five "hardship reasons" is important because when you write your hardship letter, you will be asked to explain in further detail why and how any of these situations have contributed to the fact that you are now no longer able to pay your mortgage.
Five Keys To Writing an Effective Hardship Letter:
Key #1: Be Honest
Being dishonest is not only morally wrong, but it can also hurt your chances of getting your loan modified when the lender finds out (and notice I said, when and not "if": lenders have access to copious amounts of information about you and they won't hesitate to pick up the phone and check up on your truthfulness.
Being dishonest can come about in many forms: underreporting your income, overstating your expenses, forging documents and misrepresenting facts/hardship situations (don't tell them your husband suffered debilitating injuries in a heinous car accident which caused him to be unable to work if he actually was in a little fender-bender and in an unrelated event was laid off the following week).
To contradict Nike, "Just don't do it!"
Key #2: Be Open and Honest
While you don't want to be untruthful, writing your hardship letter is likely going to be difficult because you're going to have to disclose some personal skeletons that you most likely would prefer to keep hidden away in the closet.
The reason you should be open and honest about your situation is that you want the lender to know that you really are in need of some help. If you downplay recent difficult events (for example, if your husband really did get into a heinous car accident which prevented him from being able to work, don't just say it was a fender bender!), the lender won't think you need to get your loan modified or restructured.
If your husband is in jail, say so. If your mother had a stroke and she now lives in your home and you pay her medical bills, say so. If you suddenly found yourself caring for your sister's kids so they wouldn't have to live on the streets, say so!
Please don't be embarrassed about being unemployed. So many people give up hope because they think that the lender won't even consider working with them if they are unemployed or underemployed. This simply isn't true. Many lenders will consider a Forbearance which is a situation that temporarily allows you to pay a small amount each month until your income is stable enough to qualify for a regular loan modification/restructure.
Key #3: Be Heartfelt
What I mean by this is to show the lender that you are a real human being with a real family that really needs help!
When you write your letter, go ahead and tell them your kids names and how old they are. Tell them that your eight year old son Joey was okay with giving up soccer so that he would be able to stay in his house and keep going to school where all of his friends are. Tell them what you do for a living, and tell them just how darn hard this last year has been. Tell them what struggling to pay the mortgage has really been like.
It's important that you use "feeling words" to describe what's going on in your heart and your head. Use phrases like, "I feel like...", "It makes me sad to think that...", "It's frustrating..." in order to convey your situation. Using these words helps the lender to understand your situation from your perspective.
Remember, lenders employ real people too, and they're probably in a very similar situation as you are. Get them on your side by explaining to them what's really going on in your household: so that they feel like they're sitting at your kitchen table with you eating macaroni and tuna for the fifth night in a row since that's all you've been able to afford since your husband was laid off three months ago.
Key #4: Be Polite
In your letter it's imperative that you use polite and positive language. Nobody wants to read a letter full of negativity and swear words.
Yes, your situation is probably really difficult and yes, your lender probably had something to do with getting you into a loan that you couldn't afford but now is not the time to point this out. No finger pointing, no blaming, no "passing the buck"... now is the time to be positive and polite in asking for a modification.
One other thing to point out: I'm sure you have practiced a million times what you'd like to say to the "Sonofa___"... well, never mind, but suffice to say that your hardship letter is not the place to see how many expletives you can string together in a row. No swear words. Period.
Remember to use your "Dear Sir/Madam" to start off the letter, and your best "Thank you from the bottom of my heart for your consideration" to close. Bottom line: be polite and your letter will carry more weight.
Key #5: Be Reasonable
If you think you can afford a $1200 a month payment, say so. And if you think you can afford a $1200 a month payment, don't tell them you can only afford $600! Remember that they'll be looking at your bank statements, your spending habits, your monthly bills and your take-home pay in order to justify a reasonable mortgage amount. If they think you're getting greedy and trying to "work the system" to get the cheapest possible mortgage payment regardless of what you can afford, they're going to turn down your application right away.
You need to be reasonable in your request; you need to understand that you need to meet the lender halfway, here. They need to give up demanding $x amount per month and you need to give up cable TV and any and all other non-essential luxuries in order to be able to afford your mortgage.
Go ahead and tell them that you think the 15% interest on your second loan is unaffordable and that you would prefer a 5% interest rate instead, but don't ask them to knock off $100,000 of your $200,000 mortgage because that's how much you're upside-down. Remember that the lender has to answer to their investor, so they have to be fair to both them and you.
You should also use the hardship letter as an opportunity to reiterate what you've already given up in order to free up funds to make your mortgage payments. You'll also want to point out what else you're willing to give up in order to keep your house. The timeshare? Let it foreclose. The family boat? Sell it for a loss. Suzy's dance lessons? Sorry dear, next year. Whatever it takes, let the lender know you're willing to do it to keep your home.
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