Why a good Hardship letter is so critical to getting loan mods approved

You might remember in an earlier post,  I said that Loan Modifications and Short sales were the same because we use pretty much the same paperwork.  In first case,  we want the lender to see that with a little help, the borrower will be OK.  They are actually applying for a new loan and need to convince the lender that it will work for both of them.   In the second,  we want the lender to realize that there is no way they can pay their loan payments,  even with lender help.  This finesse using the Hardship letter.  One of the sure ways to get turned down on a loan mod is to tell your tale of  woe so effectively that the negotiator is convince there is no hope.

When we first started,  I went on the internet and looked at many sample letters.  They seemed awful to me.  Most of them said they should be handwritten and short.  I think this works for a short sale but almost none of them told an uplifting story.  No wonder people were getting turned down.   So,  I started helping the clients to tell their story better.  Has it made a difference?  I don’t know but I am convinced it matters. So,  what is a good outline of what the letter should contain? 

·        Start with the good stuff:  At one time,  the borrower was OK.  Explain how long the borrower has had their loan and that they are good borrowers because they have been current for 5 years, etc.

·        What happened?:  Explain the surprise that changed things such as medical issues, cutback at work, temporary unemployment, having a baby,  etc

·        Sell the house:  Explain that they considered selling the house but with (X) in loans and the house only being worth (Y less selling expense),  it was not worth selling. 

·        Where are we now?  Show that they are upside down monthly:  Tell them what the NET take home pay is and what their monthly costs are,   showing they are in the hole (X) per month.

·        What have you tried?:  Explain what the family has done to cut back on their expenses and family budget ……then explain why it is not enough.  Note:  if the family has not actually done this,  it might be worth waiting a month or so until they actually have cut back.  I had one client who had their kids in a private school to the tune of $2000 per month.  Had another client who spent over $400 per month on Hair and massages and $50 for dog grooming.  Had another couple who spent almost $500 per month eating out and another $600 on food. If they are using their savings or retirement,  tell that story ….and that it can’t continue for long.

·        What if they are self employed?  If self employed,  it is a little more complicated.  In one case,  I had a client who had pulled out  about $150,000 per year out of their business for the last 3 years.  With the economy slowdown,  for several months,  he drew no pay and used to money to pay off debts and severance for employees. He explained all the things he cut back at work including new marketing plans for increasing sales.  Now,  after lots of belt tightening,  even in these hard times he can draw down about $100,000 per year.  He wrote this up on a separate sheet and we attached it to the Hardship letter

·        What is the good news about the future?  Tell the upside of the story.  Yes,  they are making 80% of what they used to but are employed with a good job.  (attach a letter from their supervisor).  This section must convince the bank that whatever the situation was that got them behind,  has changed and that with a little help from the bank,  they can make it

·        Close with the fact that they are embarrassed by this situation.  Tell them  that they love the home and with a little help from the bank,  they feel sure they will no longer be a burden to the bank….and that they will do anything to avoid foreclosure.  Thank them for considering their application.

I guess you can guess that we frequently wait until things have gotten better.  If they are unemployed or still not back to work because of an illness,  wait to write your letter until you can show the bank actual results.  Saying you think you can get another job won’t work. Wait until you get one before you apply.

 Hope this helps.