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Monday, March 28, 2011

How to Write a Short Sale Hardship Letter

A Hardship Letter for a Short Sale is a letter that you write to your bank or financial institution requesting that the bank consider a short sale to stop the foreclosure of your home.

In the letter you must:

State the legitimate, special circumstances which have caused you to fall behind on your house payments.
Explain your current situation and what you are doing to try and get back on your feet.
Don’t make your situation worse, by complaining to them.
Be honest and represent the facts clearly.
It is important that you put some effort into writing the hardship letter. A lender will agree to a short sale only when they are convinced that a loss on the property is inevitable. The lender then weighs the cost/benefit of a short sale versus a foreclosure.

To qualify for a short sale, the borrower must demonstrate evidence that the mortgage cannot be paid and that the property cannot be sold for what is owed on the property. Although short sale applications are assessed on a case by case basis, short sale approval is easier to obtain from a lender if the following conditions exist:

The market value of the property has decreased.
The borrower has experienced a financial hardship.
The mortgage is in default.
What Does The Bank Consider a Short Sale Hardship?
Banks will read the hardship letter to assess why a borrower is having financial difficulties. What situation triggered the problem? When did the problem arise? How has the borrower attempted to cope with the resulting financial difficulties?

The underlying reason behind most delinquent mortgage payments is what the mortgage industry defines as a "hardship condition." A hardship is an unexpected financial crisis of some sort. Although it is the lender who ultimately determines whether a situation will be deemed a "hardship," HUD guidelines may help determine status. HUD recognizes the following situations as valid hardships and justification for default:

Death of principal mortgagor
Death of mortgagor's family member
Illness of principal mortgagor
Illness of mortgagor's family member
Marital difficulties
Curtailment of income
Excessive obligations
Inability to sell property (this is true for all of Las Vegas)
Job Relocation
Property problem (roof leaks, construction litigation, etc.)
Inability to rent property
Military Service
Casualty loss (such as a Hurricane, etc.)
Energy-Environmental costs
Servicing problems
Payment adjustment (ARM Adjusting)
Payment dispute
Transfer of ownership pending
Abandonment of property (due to condition of property, for instance)
It is important to keep in mind that some scenarios may meet these criteria and yet not be viewed favorably by a lender. Additionally, the more proof of the hardship which a borrower is able to produce, the better.

What Does NOT Constitute a Short Sale Hardship
QUESTION: Why are some homeowners asked to pay substantial promissory notes in exchange for a short sale approval, while other homeowners are not asked to pay a promissory note at all? The answer can almost always be found by looking at the experience (or lack of experience) of the Real Estate Agent. There are certain factors which minimize hardship in the eyes of Banks and Bank Investors, and are essentially "Short Sale Deal Killers." A Realtor experienced with short sales will be able to explain the banks perception of hardship and how it applies to your particular situation.

Here are a few scenarios which are guaranteed to raise red flags in the eyes of your bank. Bank negotiators are trained to look for these items, and once a bank has determined that your short sale falls into one these "minimized hardship" categories, the chances of you being required to pay a promissory note increase exponentially.

1. Your Mortgage Payment is Current

Banks may not take you seriously if you have the ability to pay your monthly mortgage. This does not constitute a hardship in the eyes of the bank. Remember, a bank will only consider a short sale if they think the chances of foreclosure are eminent. As long as you continue to make your monthly payment, the bank will likely "sit back and wait" to see if you will make another payment next month too. It is possible to obtain a short sale approval while continuing to make your mortgage payment, however, this places you in a position where the bank will likely request a very large promissory note or cash contribution at closing. The less your hardship in the eyes of the bank, the greater your chances of paying a promissory note.

2. Collecting Rents and Failing to Pay Your Mortgage

Banks will cooperate with investors who are experiencing hardship, however, if you are collecting rent from a tenant and failing to make the monthly mortgage payment on your tenant occupied property, then this is the #1 Short Sale Deal Killer. Banks do NOT look favorably upon investors who are getting paid by a tenant, yet failing to honor their mortgage obligation. In fact, these type of investors are far more likely to be sued by their bank in a deficiency judgement lawsuit than anyone else. Non-owner occupied properties are eligible for short sale approval, however, it is important that investors understand the banks perspective of hardship. It makes no sense to continue collecting rent from a tenant, only to wind up being sued by your bank once the home forecloses. These type of investors will have a hard time convincing a judge that they acted in good faith.

3. Recent Purchases on Your Bank Statements or Inquiries on Your Credit Report

When you apply for a short sale, the first thing the bank will do is pull your credit. (Yes, they have the right) They will use your credit report and your bank statements to determine the extent of your hardship. If your bank statements show recent electronics purchases at Best Buy, or show purchases made on a recent vacation to Maui, or if your credit report shows recent credit inquries at car dealerships, etc., then you are going to have a much harder time convincing your bank that a hardship exists. Banks are very smart. They intentionally make the short sale process complicated, to sort out the people with actual hardship from the people who may still have the ability to make their mortgage payment.

A Real Estate agent who is experienced with short sales can help you prepare a workout package which conforms with the banks definition of legitimate hardship. You do NOT need to be poor or broke to qualify for a short sale. Actor, Nicolas Cage is a multi-millionaire, yet last year, he successfully did a short sale on his Las Vegas home. Hardship is not solely determined by how much money a person also factors in a person's expenses, especially if expenses have increased and income has decreased.

Basically, the two questions a lender asks itself when reviewing a short sale packet are:

1) Is this property going to go into foreclosure?

2) If this property goes into foreclosure, will we lose less money with a short sale?

Even if the hardship does not completely meet the criteria of a true hardship, the lender may approve the short sale because they believe that the property is going to go into foreclosure regardless.

NOTE: As you write the hardship letter, you need to accomplish two goals. You MUST:

1) Provide as much written explanation of your hardship as possible. Be specific.

2) Convince the bank that you are unable to make any more payments

The borrower should write the letter in their own words, but they need to make sure that there is a clear picture of their financial condition, and back up their claims to hardship with documentation, such as pay stubs, medical bills, job layoff letters and more. The numbers should clearly illustrate that the borrower is headed for foreclosure or bankruptcy. This will motivate the lender to cooperate.

Lenders are all about numbers, so the letter isn't a sob story about the borrower's difficulties. It should be a factual description of a financial situation that is leading up to a bankruptcy or a foreclosure on their home, or both. The lender must be convinced that their only other option is foreclosure, and then they can analyze the numbers to see if a short sale is a preferable alternative.

The short sale hardship letter can be typed or handwritten, but we have found that handwritten is most effective. It should contain some standard elements at the top of the letter including the name of the borrower(s), the date, the lender and the loan number. The end of the document should have the borrower’s signature with the date, as well as the signature of any co-borrower. The length is not important so make it as long as needed to have the desired impact.

After assembling hundreds of short sale packages I have found that more than any other document, the hardship letter can make or break a short sale. While banks care most about dollars and cents, it is important to remember that the package will be reviewed by an individual loss mitigator. Like the rest of us, this loss mitigator is a real person with real emotions who cannot help but be influenced by a sincere story of hardship.


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