How to write an effective hardship letter

This blog was updated August 3, 2023. Read the most recent version.

Like many Americans, you may have fallen on tough times and have either started to fall behind on mortgage payments or you are bound to shortly. You've heard that the government has programs that may help you stabilize and your lender could be willing to offer an alternative if you don't perfectly qualify for federal relief. You contact the bank to see what can be done and with the paperwork they provide, they request that you construct a letter to explain your hardship. Simple, right?

Unfortunately, like most people who are worried about a potential mortgage default, your current financial instability isn't due to a single event. Rather, the result has come through a series of misfortunes that, when pooled together, lead to a lack of income needed to stay current. Though it would be easy to write a four-page essay on why you are requesting assistance, drowning your audience with words will be as ineffective as omitting the explanation altogether.

Part 1: Explain what happened and why you are applying.

Focus only on events that happened since you took out the mortgage and that have directly influenced your income that would be used to make your mortgage payment. If you refinanced your loan in 2008, it is irrelevant to list a job loss or the conversion from working wages to social security if that took place in 2006. Stating a pre-existing hardship does nothing to explain why payments were made after origination and will be missed without intervention moving forward. Furthermore, if the reasons why the payments are difficult pre-date the delinquency, it will seen as more an issue of over-financing or an inability to react financially - and not the unavoidable circumstantial hardship the lender is concerned with remedying.

Part 2: Specifically illustrate the time and severity of the hardship.

Provide detailed feedback as to when the hardship occurred and how much it affected you. An example would be to state the exact date that you lost a specific job title and the date you replaced it with another, further detailing the percentage of income that was lost.

Part 3: Back up the reasons traditional remedies won't work.

State why the lender must help you in order to avoid default. Alternatives to default, as your lender sees it, include refinancing the loan, depleting savings to stay current, and even selling the property if the current market would allow you to repay the loan by doing so. Touch on any of these that are applicable. A refinance isn't possible if you can't qualify or you don't have enough equity in the home. Continuing to pay isn't possible if you have exhausted savings and have sold off items like recreational toys, secondary cars, and collectables. Selling the home may not be mutually beneficial if the mortgaged amount exceeds the potential sales price plus the cost of paying a realtor.

Part 4: Detail why you are stable enough to succeed with a modification.

Mortgage modifications have an estimated 70% or more failure rate. Your mortgage company will likely need more than just your word that you will be successful with payments before approving a major contractual addendum like a modification. Focus on explaining why payments have been missed and why you would actually be able to make payments if a modification was approved. Mention all of the things you have done to stabilize financially and free up income to meet the lender halfway. Mention budget changes, cut or reduced expenses like entertainment, eating out, or travel.

The most important information to include is what you have done with the money you have saved in the event that the mortgage company has accelerated the loan, meaning they are no longer accepting monthly payments. This will show, in cases of temporary hardship or income loss, that you are ready to move forward and have the momentum financially to stay current once the loan is reinstated. The more time passes after the hardship is over, the more savings will matter as far as documenting your ability to resume on time payments.

Part 5: Explain what you want.

Here your goal is to explain what you are looking for. There is merit to both keeping your expectations realistic and also being firm with your limitations. With being realistic, take an objective look at how much income your payment currently consumes. If you gross $6000 a month and your payment is $1050 (17.5% of gross income), then a fair expectation is to have the lender bring your delinquency current with you being able to resume regular payments with the changes you have made to your budget. If you gross $3500 a month (after going back to work from being laid off) and your payment is currently $1200 (34.28% of gross income), then it is fair to request some degree of term alteration that would make the payment more affordable ($1000 - $1100) with additional budget changes. With that said, if you know that a certain payment is needed in order to get you back on track with regular on time payments, be sure to mention that amount.

With limitations, you just want to define your breaking point so you don't encourage options that are bound to fail. If you are on unemployment and make $2200 a month and you have a $2600 mortgage payment, it may be best to admit that your limited income is entirely needed to provide utilities and basic needs - leaving you with the temporary inability to make any sort of payments. In this case, you could try to obtain a short-term forbearance (postponement of payments) that may help you avoid foreclosure while you continue to look for work.

Part 6: Keep it simple.

Though I am providing some examples, it is important to write your own hardship letter. By being short and to the point, you will provide potential underwriters with a readable account of just why you need help and why that help will matter.

Final thoughts

Though almost all lenders will require a homeowner summary before processing a request for hardship, there is a chance that it won't matter much in the process. Many investors no longer use hardship letters as part of their approval process for a very obvious reason. It rewards those who can write articulately after researching what banks look for and damns those who either misunderstand the purpose or else just don't have the communicative tools to correctly explain their hardship.

Don't expect the result to be a tailor-made plan based on your particular experience. Most mortgages are part of huge investor pools that are subject to generalized methods of deviation in the case of default. If a lender cannot approve something based on your specific request, most times they will offer what they can. That way, they'll provide the homeowner with a chance to rise to what they can do versus denying the request altogether - based on what they can't do.

Lastly, regardless of your circumstances, it's always better to take action right away. You will likely have less options the more time passes.

If you could use a little help from someone in writing a hardship letter or have questions about your finances, give LSS a call at 888.577.2227. You can also start online counseling now. We have certified Foreclosure Prevention and Financial Counselors here to help you take action!

Author Tim Fischer with LSS Financial Counseling is a Certified Financial Counselor who specializes in foreclosure prevention counseling.