How To Write a Hardship Letter for a Short Sale

A homeowner who can’t afford their mortgage and wants to avoid foreclosure can send their lender a hardship letter to try to get a short sale approved. Short sales are preferable to foreclosures because they’re less damaging to a homeowner’s credit score, prospective employment, and ability to secure a future loan. This means short sale hardship letters are particularly important.

If you choose to write a hardship letter for a short sale, you’ll want to make yours stand out to lenders so that you have a better chance of avoiding foreclosure. This article discusses what to include—and what not to include—in a hardship letter requesting approval for a short sale.

What Is a Short Sale?

A short sale occurs when you sell your home for less money than you owe on the mortgage. The short sale process allows lenders to take the money from the sale to pay off part of the mortgage. What happens to the rest of the balance owed will depend on your mortgage company and/or state law. Mortgage companies have different ways of dealing with any deficiency balance remaining after a short sale. They could:

• Get a deficiency judgment for what's still owed on the mortgage

• Forgive the remaining balance entirely

• Forgive part of the remaining balance while still pursuing you for the remainder

The short sale process is one way to avoid foreclosure. Lenders must approve short sales, so don’t attempt to short sell your home before getting this required approval. Also, be aware of short sale scams before you proceed with this process.

To get a short sale approved, you’ll need to submit a hardship letter and supporting documentation. A hardship affidavit and supporting documents make up a short sale package that the loss mitigation department will evaluate before approving a short sale. The letter explains what caused your financial hardship and why you have fallen behind on the mortgage. The documentation will help your lender understand your current financial situation. It should support what has been written in the letter. 

What Needs To Go into a Good Hardship Letter?

A good hardship letter is brief and to the point, but specific. Some lenders already have a form to fill out, but if you’re writing your own, you should consider including these pieces of information in the heading: 

• Today’s date

• Lender’s name

• Loan number

• RE: Hardship Letter—Short Sale for (property address)

The greeting could be “To Whom It May Concern” or “Dear (lender’s name).”  

The first paragraph should state when you purchased the home and when your financial difficulties began. For example, your boss reduced your work hours five months ago and then laid you off last week. In the body of the letter, briefly explain why the hardship was significant enough that it made you fall behind on your mortgage.

The hardship that led you to fall behind on your mortgage must stem from a financial challenge beyond your control. For example, addiction may be a medical condition but isn’t yet recognized by lenders as an “excusable” force beyond an individual's control. The U.S. Department of Housing and Urban Development (HUD) recognizes several valid reasons for homeowner default. 

Incidents that may lead to financial hardship include:

• Incarceration

• Divorce

• Death of spouse

• Loss of employment or layoff

• Loss of income or reduced work hours

• Extreme medical expenses

• Family’s medical emergency

• Military service

• Natural disasters

• A job transfer that requires selling your home and moving to another state

• An unexpected event resulting in costly repairs and maintenance fees on your home

You can conclude the letter by explaining any ways that you’ve tried to fix your financial challenges but couldn’t. This is where you can mention previous failed attempts at loan modification or refinance. End the letter by politely requesting a short sale as the only reasonable means to avoid foreclosure.

The letter does not have to be lengthy or typed. Short, handwritten letters are fine. But at the end, make sure to sign and print your name and include your contact information. You can place your address, phone number, and email after your signature.

Documents To Include With a Hardship Letter

A hardship letter should be emotionally persuasive, but a sob story isn’t enough. The letter must also state events that prevented the borrower from meeting monthly mortgage payments and include evidence that supports those claims.  

Documents that show true financial difficulty beyond the borrower’s control include:

• Bank statements

• Tax returns

• Pay stubs

• Letters from work

• Medical bills

• Extensive repair fees

• Financial statements

These documents should reflect the facts stated in the letter. Remember you don’t have to meet all the “financial hardship” criteria to qualify for a short sale approval. One or two life-changing events can lead borrowers to default. Remember to mention all the efforts you’ve made to pay down the obligation.

What Shouldn’t Be Included in a Good Hardship Letter?

A hardship letter must convince the lender that you are totally out of options. That you have no foreseeable way of making any future mortgage payments. That you are headed for bankruptcy and your real estate is headed toward foreclosure. That your financial hardship is real and documented.

In other words, you don't want to give the mortgage company any hint that you may be able to fully or partially pay the debt in the future. You don’t want to go on about, let’s say, your future potential to:

• Get a higher paying job

• Come into an inheritance

• Borrow money from friends or family

• Sell off your personal belongings

The letter should focus on how you’re so deep in debt, you can barely afford basic living expenses. Mentioning future business prospects, hidden assets, or other ways to get out of debt weaken your claim of hardship. This may result in denial of your short sale application.

Don’t give the loss mitigation department any reason to deny your application. Lenders will crunch the numbers to make sure a short sale nets more than foreclosure, but the hardship letter plays a role in that decision. So try to avoid doing anything that makes you look bad or less believable. 

For example:

• Don’t blame the mortgage company for all your financial problems.

• Don't complain that you lost all your money due to a drug addiction, gambling habit, or because you couldn’t control your spending.

• Don’t copy and paste directly from sample template letters you find on the Internet.

Your letter should be original and reflect your situation. If you use someone else's letter, others are probably doing the same. Remember that mortgage companies see tons of these letters. Reading the same fact pattern can set off alarms and leave doubts about your story. 

Let’s Summarize…

Financial hardship is caused by circumstances beyond the borrower’s control. Examples include natural disasters, disability, unemployment, and medical emergencies. A good hardship letter clearly describes how this hardship prevents the borrower from making future mortgage payments. It’s supported by documents such as pay stubs, tax returns, and repair bills. 

Don’t copy word-for-word from a template letter or blame the mortgage company for your financial woes. Leave lenders no room for doubt about your credibility or future financial ability to pay. A well-planned hardship letter can increase your chances of gaining a short sale approval.