A hardship letter explains to a lender’s representative why the borrower (homeowner) is unable to make their mortgage payments. This letter becomes part of the lender’s case file to support the reason(s) the homeowner has been granted a loan arrangement or short sale. I suggest that you never lie about his difficulties, as it could be grounds for future legal action by the lender.

The most requested reason is that the property has lost value and the borrower no longer wants to pay their mortgage. If the homeowner is able to make the mortgage payments even though the market value declines, your application for a loan modification or short sale will likely be denied. The reason a lender requests a financial statement is to see how much money the homeowner has and where to find the money if the lender gets a judgment that the borrower will be charged.

Here are reasons for the difficulties I’ve seen:

1. Job loss for one or both borrowers (homeowners) and no income to pay the mortgage. While a lender may ask you to plunder your retirement funds, this is unreasonable and detrimental to your financial well-being.
2. Involuntary job transfer where there are suddenly two households to support with the same or lower income.
3. Instead of losing your job, your employer keeps you, but your income is substantially reduced.
4. Illness resulting in your inability to earn a living.
5. Substantial recurring medical bills that must be paid or loss of medical care will result in serious medical problems or death.
6. A disability caused by an accident or medical reasons that result in the only source of income being state or federal disability income payments.
7. Disability of a family member such that the primary or secondary breadwinner must stay with the disabled person instead of having a paid job and a fixed income.
8. Death of the main breadwinner, their spouse or a relative.
9. Divorce or separation resulting in the loss of a substantial portion of the family’s income.
10. One or more earners in the family who are suddenly incarcerated, resulting in a substantial loss of income to support mortgage payments.
11. Extremely depressed housing market where your neighborhood is being decimated and becoming unsafe to live in.
12. Notice or decision to leave the country (America) for a foreign land and with no intention of returning in the future.
13. Decision to investigate or file for bankruptcy. This can be an excuse, but do not apply until the short sale or foreclosure is complete.
14. You are facing a “reset” of your interest rate that will not allow you to continue making the payments of the new mortgage. You would think it would be easy for the lender to make the decision to withhold the interest rate to keep you in the property, but this lender’s favorable offer only happens about 5% of the time. The rest of the time, the property goes into foreclosure.
15. A large number of foreclosures are occurring in your community and the neighborhood is rapidly deteriorating. The lender may not want to hear this, but you can show proof by getting statistics from your local newspaper or a local real estate agent who can research your neighborhood.
16. Inability to maintain the property so much that it becomes a health hazard to live there.
17. You used “reported income” on your original loan application and lied per the mortgage broker’s instructions (or your own). Now, the reset terms of the mortgage have caused her actual income to be insufficient to pay her mortgage. I mention this because your lender may ask you to sign an IRS “Authorization to Release Information” regarding your tax returns for the last two years. In reality, the lender wants his tax returns for the years he applied for the mortgage to verify his actual income. If he “cheated” with the amount of his income, it is serious mortgage fraud.
18. An inability to pay rising property taxes, HOA (Home Owners Association) fees or assessments, or skyrocketing insurance premiums.
19. Inability to pay income taxes due – This reason is important to the lender due to a potential IRS tax lien on the property that is NOT removed by foreclosure.
20. Inability to pay off massive credit card debt or other monthly revolving credit payments that are impossible to pay due to accelerated interest or penalties.
21. Inability to pay for property maintenance or damage caused by an act of nature, specifically because there is no insurance coverage for a natural disaster.
22. Inability to pay routine monthly bills due to a loss of income or an increase in the cost of the owner’s monthly bills.
23. The mortgaged property is vacant for any reason and cannot be properly maintained.
24. Inadequate cash reserves when the property was purchased, so any change in the income stream results in an immediate inability to make mortgage payments.
25. Inability to pay property taxes that may or may not already be delinquent. This is a major problem with lenders because a tax deed sale can extinguish your first mortgage. Lenders will generally pay delinquent taxes to prevent a property tax certificate sale and ultimately a tax deed sale.
26. Developer insolvency so that basic services and maintenance are no longer provided to the community and the HOA goes into receivership. This can result in interruptions in water and electricity service.

The above commonly used difficulties can also be combined into a finalized card for your particular situation. It is important that if you are doing a hardship letter, that you really have a hard time. If you have financial reserves and are employed, unless your bills exceed your income, you may not be approved for a short sale or loan modification.

Generally, it is best to try a loan modification first before a short sale. The package of documents you will need for the loan and the short sale are almost identical. While the lender’s package will stipulate what is needed, it is “advisable” to add proof of your hardship if it can be documented in photographs, stacks of medical bills, or other ways to bolster your case.

Please review the requirements carefully before simply filling in the blanks and submitting your loan modification application or short sale application. Especially with the loan modality, you are giving up your rights to contest a foreclosure by signing. Lenders typically require this as a stipulation when they grant a loan modification because 75% to 80% or more of all loan modifications are defaulted within eight months.