Representing homeowners in a short sale is likely all-too commonplace for you in today’s housing market. As their real estate agent or broker, this group of homeowners relies on you for expert advice to get their short sale approved. A well written hardship letter is crucial to getting this approval.
Along with the homeowner’s financial statements, the bank will require a hardship letter before considering a request for a short sale or loan modification. A hardship letter substantiates the changes affecting the homeowner’s ability to make payments.
The hardship letter must explain three things:
- how the homeowners got into their present situation;
- how they have tried to avoid or improve this situation; and
- a request stating exactly what they are applying for.
Without this explanation, the bank may determine that the homeowners can still afford their current monthly payments and decline the short sale request.
When assisting and advising these homeowners on how to write this letter, keep in mind that their short sale application is not the only one on the loss mitigator’s desk. The letter must be detailed, yet concise. Loss mitigators are more likely to give their full attention to a concise, engaging letter than a long letter that rambles on. Unnecessary explanations may also raise red flags and cause the loss mitigator to disapprove the request.
What changes have occurred?
A hardship letter must be honest and to the point. Good, solid reasons are essential when preparing the letter. Hardships may include:
- reduced income;
- job loss;
- an illness, medical emergency or death in the family;
- a job transfer (voluntary or involuntary);
- a divorce or separation;
- an exotic mortgage (i.e. adjustable-rate mortgage);
- incarceration; and
- increased expenses and excessive debt.
If relevant, have the homeowner use concrete numbers to explain loss of income or negative cash flow. Rather than just saying they’re borrowing money to make their mortgage payment, have them state the source and the amount of the additional debt they are incurring. For example: “We have borrowed $1,000 per month for the past six months against our credit cards to make our payments.”
Also, homeowners stating that they would like to “walk away” simply because their home is worth less than they owe on it can be a big turnoff to loss mitigators. Although negative equity is a hardship and a factor for a short sale, banks will seldom grant short sale approvals solely on the basis of being upside-down.
While keeping the facts concise, your clients should include as many issues as possible which have affected their financial situation. Is their home or car in need of repair? Have they incurred excessive vet bills due to pet illness? Are they now providing in-home medical care for their elderly parent? As morbid as it sounds, the more depressing the issues are, the better.
Homeowners should limit this part of the letter to what has occurred, and not what they fear or expect from the future. Frankly, the bank doesn’t care—so unless there’s a bankruptcy or foreclosure in the foreseeable future, homeowners can leave their financial expectations out.
What steps have been taken?
Next, the letter must briefly cite any steps taken to avoid defaulting on their loan, such as:
- taking a second job;
- cutting household expenses; or
- tapping into savings.
Every sacrifice that has been made by the homeowner should be listed here. If they’ve canceled their gym membership and have had to sell their motorcycle to make ends meet, list it.
What outcome is being requested?
Lastly, the letter should close with a request for a specific outcome. What is the homeowner applying for? Are they requesting a loan modification or a short sale?
As their broker, you can assist them in writing their letter, but it is always best if the letter is written by the homeowner. Not necessarily by hand, but certainly in their own words.
Following these steps may improve the likelihood that the bank will consider the homeowner’s file for a short sale. Although a well written letter never guarantees an approval, a good argument in the homeowner’s favor always increases their chances of success.