What is a Loan Modification Hardship Letter?
A loan modification hardship letter is a letter you provide to your lender explaining the circumstances that caused you to fall behind on your mortgage payments and why you are now able to resume making regular monthly mortgage payments. It is important to provide your current financial information and demonstrate that your expected modified mortgage payment is no more than 1/3 of your new gross monthly income.
How Long Should the Hardship Letter Be?
Make the hardship letter short and sweet. The letter should be no more than 1-2 pages. Most Servicer Representatives are unlikely to read a lengthy letter. In addition, your Point-of-Contact may change and multiple stakeholders within the Servicer may be scanning this letter. For those reasons, you should make sure the letter is succinct and focuses primarily on hard numbers.
How Should the Hardship Letter Be Structured?
Make sure the hardship letter is organized. First, state the fact you are looking for a mortgage loan modification and what the terms are that you are looking for. Second, provide detail on what your financial hardship was that caused you to get behind on mortgage payments. Third, explain that your financial hardship is behind you and that you are now able to afford a modified mortgage loan payment. Fourth, provide a closing statement about why you want to keep your home.
What Details Should You Include in the Hardship Letter?
Make sure to focus on the numbers. You should use the gross income figures, the monthly mortgage payment figures, and give the ratio or percentage of your total gross monthly income that is dedicated to paying your mortgage. You should provide the same figures and ratios for the period you were suffering from a financial hardship and again for the situation in the present day. You are trying to demonstrate that the financial hardship legitimately made paying your mortgage impossible, but that you can easily afford the payments today.
Provide the True Financial Picture; Don’t Try to Second-Guess the Numbers
Make sure to tell the truth. Don’t overthink and obsess over what you are going to tell the Servicer about your income. Just tell the truth. It is the easiest thing to remember and to substantiate. And, by getting the real facts straight, it will help you and any representatives (attorneys, housing counselors, or financial planners) to see clearly what changes you may need to make (i.e., increasing income or cutting expenses) that will improve your application.
Explain Your Financial Hardship and What Has Changed
A Hardship Letter needs to make the basic case that you were able to afford your mortgage until you experienced a financial hardship. But, for that financial hardship you would have kept paying, as you are prepared to do now, today, since the hardship is over. The financial hardship needs to be well defined and understandable. You should give some brief detail about the lengths you went to in order to stay current on the mortgage despite the hardship, but that it was not possible despite your best efforts. Then, you need to tell the bank that your financial circumstances have improved so that you can now afford a modified payment.
So, what are the valid reasons for financial hardship that are recognized by servicers and the banks as legitimate reasons why you couldn’t pay your mortgage loan?
There are 5 Valid Reasons for Financial Hardship to Use to Get Your Loan Modification Approved
- Job Loss or Unemployment
- Serious Illness of a Borrower
- Divorce
- Death of a Borrower
- Unforeseen Increase in Expenses & Reduction of Income
[1] Job Loss or Unemployment
The most common reason people get behind on their mortgage is due to a job loss, unemployment, a reduction of hours, a pay cut, or other employment-related reduction in income. It is easy to understand why a major reduction in income would make it difficult to pay your mortgage.
When you have multiple hardships, you should focus your Hardship Letter on job loss or unemployment. While this can be embarrassing to admit, the bank is not going to judge you or require an explanation. All the bank is looking for is a reasonable explanation why you got behind that is logical, and which is temporary.
If you always paid your mortgage when employed, but stopped due to unemployment and are ready to resume payments now that you’ve secured a new job, that makes you look like a good candidate for a modification.
[2] Serious Illness of a Borrower
Lenders take an expansive view of what qualifies as a serious illness and will consider a wide-range of ailments as qualifying for relief. The one requirement is that the illness effects household income, either because of the increased medical expenses incurred or because the illness prevented the borrower from working.
A serious illness can be a one-time health event like a heart attack or stroke or a chronic condition. Drug or alcohol addiction can qualify. Even caring for relatives such as in-laws who have come to live with you or parents you are placing in a senior living facility can fall within the “serious illness” category.
When writing a hardship letter concerning missed payments due to a serious illness or medical reason, it is important to explain why the illness caused a financial hardship in the past, but you are now able to resume payment of your mortgage payments.
With the “serious illness” category of financial hardship, the lender will expect to see documentation including medical records, medical bills, and other corroborating information from medical professionals or treatment centers that backs up the information contained in your hardship letter.
[3] Divorce
Divorce or separation is a common reason why homeowners experienced a financial hardship. During a divorce, the same income must support two households, and there may be additional legal costs associated with the divorce proceedings themselves.
For the “divorce/separation” category of financial hardship, the lender will expect you to provide supporting documentation in the form of court records like a divorce complaint, CIS filed in connection with divorce proceedings, a marital settlement agreement entered into between the parties, or a divorce decree and final judgment of divorce.
It is common in a divorce proceeding for one party to provide a “Quitclaim Deed” conveying title from one party to the other.
The key here is to tie your “divorce/separation” to the financial hardship you suffered, and then explaining how you have improved your finances so that you are no longer suffering a financial hardship.
With “divorce/separation” it is important to realize that if the lender made a loan to two co-borrowers, they may not be moved by the fact that a deal was reached between the two of you to convey title to one party or the other – the lender will feel that both borrowers made a financial commitment and will expect both parties to continue to be obligated under the Note and Mortgage.
For this reason, there are special considerations in “divorce/separation” hardship situations and strategies for refinancing that must be considered.
[4] Death of a Borrower
It is fairly obvious why the death of a borrower would explain and excuse missed payments on the mortgage loan and would constitute a financial hardship. Many times it is the parent who passes away and the adult children begin to work on settling up the parent’s affairs. In these situations, it may be necessary to apply to assume the mortgage loan. It may be necessary to probate the testator’s estate and receive Letters Testamentary or Letters of Administration in order for the heirs to formally take over their parents’ loan obligations.
The lender will expect to be provided with a death certificate as part of the documentation of this kind of financial hardship. The lender will also expect to be provided with “Letters Testamentary” or “Letters of Administration” designating you as the person with authority to act on behalf of the borrower’s estate.
Usually the financial hardship is to be resolved by substituting the party responsible for mortgage loan payments.
Unlike other financial hardship situations, the assumption concept means that the “new borrower” may not have any negative credit impacts or blemishes on their financial record and may be able to simply refinance the existing debt.
[5] Unforeseen Increase in Expenses & Reduction of Income
Unforeseen Circumstances is the “catch all” category of financial hardship that should be used if your hardship does not fit into the other categories.
There are several common fact patterns that constitute unforeseen circumstances, increased expenses or reduction of income:
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Natural Disasters or Home Repairs:
If you have experienced a flood, a faulty roof, asbestos, termite or mold infestation, an environmental remediation, or other major house repair that rendered the home uninhabitable for a time and required a significant cost that may or may not have been fully covered by insurance this may constitute a “financial hardship” that explains why you stopped paying your mortgage temporarily.
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Moving a Loved One Into a Long-Term Care Facility:
If you have experienced a major expense to help a loved one move to a senior living or long-term care facility and the financial burden fell on you and your household, this can explain why you stopped paying your mortgage temporarily.
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Educational Expenses:
If you had a change of careers and had to go back to school or had a major educational expense for one of your children, this can explain why you stopped paying your mortgage temporarily.
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Child-Related Expenses:
For two-income households, the costs of daycare may create a temporary “financial hardship.” Similarly, a major surgery, orthodontic procedure, injury, hospitalization, or the like may have created a “financial hardship” that explains why you stopped paying your mortgage temporarily.
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Reduction-in-Income:
For real estate agents, financial advisors, or commissioned salespeople, it is understandable that sudden unexpected market fluctuations or a severe recession may have impacted your income and caused a “financial hardship” that explains why you stopped paying your mortgage temporarily.
These are just a few common examples. It is important to specify how the hardship effected household income, that it was a major expense or change that came on suddenly and unexpectedly such that you could not plan and adjust your finances, and that you dealt with the unforeseen circumstances and are now in a position to resume payments on your mortgage loan.
Make Your Hardship Letter Authentic
Everyone’s situation is unique, and you want to provide just enough detail to show that you are a real person, without turning the letter into a novel. When it comes to the reason you fell behind on your mortgage—be direct. If you got a divorce, you don’t need to tell the whole story. Get right to the point. If you lost your job, you don’t need to preface this information by telling the bank how you were unfairly treated at work or how you worked extra hours for eight months during an economic downturn to try to keep a job that you hated. It is sufficient to say, “My industry was heavily effected by covid-19 and I lost my job in March of 2020.” However, you could give some details that show some personality in talking about how you dealt with the situation that would help the Point-of-Contact on your file identify with you and sympathize with your situation.
“While applying to jobs, I waited tables at a the local pub to try to make ends meet, and even resorted to selling my childhood baseball card collection on eBay to try to keep up with the mortgage.”
You can also personalize your letter by mentioning the names of your family members that live in the home with you and giving some details about where your children go to school or what activities they participate in within the community. These are compelling reasons why you are motivated to keep your home.
“We live in Sportsville, NJ, home of the Wolverines, and my son Jonathan plays Football for the State-Champion Team. Jonathan is only a Sophomore but is the team’s starting Quarterback. There is virtually no rental housing in Sportsville. If we lose our home and have to move, we probably won’t be able to stay in the District and Jonathan’s dreams of leading his team to a State Championship will be lost too, which would break our hearts.”
SAMPLE TEMPLATE FOR HARDSHIP LETTER
Paragraph 1 – Background, Request for Mod, Summary of Income Reduction Causing Hardship
I have owned (My Property) since 2005, and hope to continue to own this property for many years to come.
I am writing to explain the circumstances that have caused my mortgage to become delinquent and to request consideration for a loan modification. My mortgage number is XXXXXXX. When I applied for the mortgage loan in (year), my income was (amount per month), which provided sufficient income to cover the monthly payments. Notably, this was a negatively amortizing interest-only loan that I entered into in reliance on the mortgage broker and mortgage lender, but I did not understand the predatory nature of this asset-based loan at the time or the risk inherent in such a loan if the housing market collapsed and I was unable to refinance out of this extremely expensive subprime loan due to market conditions.
As was the case for many homeowners during the Financial Crisis, the downturn in the housing market and plummeting home values severely impacted my ability to pay and my ability to utilize the equity in my property to secure a more traditional fixed-rate mortgage loan. As a result (insert number of months ago hardship started) in around (date missed payments started), I experienced (unemployment, a drop in income, etc.). As a result of my reduced income my mortgage payment of $X,XXX/mo would have been (% of reduced monthly income), which was not feasible at the time.
Paragraph 2 – Detail on How & Why You Fell Behind
When (my employment status changed/the market suffered a downturn from the financial crisis/etc.). Despite my best efforts to keep up with my financial obligations, I quickly fell behind on my mortgage payments and have not been able to catch up.
While I am now earning more money and can afford a modified loan, I am unable to simply pay back the arrears that have accrued, due to the sky-high rates of interest, which arrears are now quite substantial.
Notably, I have made attempts to settle the debt with Servicer at various times, once modified the loan, and have negotiated for a payoff or further modification for years, all in recognition of the extremely high rate of interest on the underlying loan and the fact the majority of the arrears are owing to the continued high interest charges. I have always been willing to pay the principal and a reasonable rate of interest on the true amount owed.
I truly want to remain in this home and it is my full intention and goal to repay the money what I borrowed through this refinance, but I am unable to do so under the current loan terms. That is why I am requesting a loan modification.
A lower payment, modified principal balance, and reasonable rate of interest, will be more manageable, and a modification will allow me to bring my loan status to current – something that will benefit me as well as your financial institution.
Paragraph 3 – What Has Changed to Ameliorate the Hardship / Why You Can Pay Modified Loan
My total income (describe change in ability to pay) has increased substantially from the (amount per month) I was earning in 20XX when the hardship began, and I am now earning (amount per month), which only requires XX% of my gross monthly income and takes into account the rental payments on this and other properties I own, and is sufficient income to cover a modified mortgage payment.
Paragraph 4 – Closing Paragraph
Please let me know what I should do next as we work toward reaching mutually agreeable and beneficial terms. I greatly appreciate your prompt attention to and assistance with this important matter and look forward to hearing from you soon. You may reach me at (insert phone number) or contact me in writing via email at (insert email address) or postal mail at the address that appears at the top of this letter.
My attorneys, Fazzio Law Offices, LLC, are submitting my loss mitigation paperwork and assisting me in saving my home. You may reach them at (201) 529-8024 or e-mail them at [email protected] or [email protected]in order to discuss my application. Their mailing address is 5 Marine View Plaza, Ste. 218, Hoboken, NJ 07030.
Regards,
Insert Your Name
Additional Resources on This Topic
https://www.forbes.com/advisor/mortgages/how-to-write-a-hardship-letter/
https://www.hsh.com/homeowner/how-not-to-write-a-loan-modification-hardship-letter.html
