When financial difficulty comes and you need to refinance a loan or mortgage, writing a hardship letter might be part of the process. In general, financial institutions need to know why someone is unable to continue paying before they agree to more generous terms. They also need to make sure the borrower has implemented correcting measures without success.
A hardship letter accomplishes this purpose, helping families inform financial institutions that an adjustment to loan or mortgage terms is needed. Writing it may not be the most pleasant experience, but it provides many benefits when done right.
In this article, we discuss what is a hardship letter, under which circumstances is it beneficial to use it and things to consider during the writing process.
A hardship letter is a document explaining why a person is no longer able to meet financial responsibilities
A hardship letter is a written document where an individual makes an argument in favor of a specific outcome. To achieve this result, people have to make sure the hardship letter includes several things. First, the letter has to explain in detail how the individual reached financial hardship. This involves talking about personal decisions, external factors, and more.
For example, a family interested in refinancing their mortgage should explain real estate market changes in the area, and how it affected the value of their property.
An individual who wants to redefine the terms of a loan should explain what circumstances are now affecting their ability to cover payments. Sometimes, financial institutions require documentation supporting the claims made in the hardship letter, such as statistical data from government agencies or an unemployment certificate.
Second, the individual should discuss what they have done to improve the situation. Proving that hardship exists is often not enough to obtain more generous terms from a lender. They need examples of how the individual has tried to remain financially responsible, such as by reducing expenses or joining job search platforms. Finally, the letter needs to discuss how attempts at improving the situation have failed.
Hardship is defined by events which negatively affect someone’s ability to cover payments
There are many situations which can be considered as financially disadvantageous. For example, a family who got a mortgage to purchase a $200,000 home in 2008 might be in a difficult sport today if their house is now valued at $120,000.
The house has lost half of its value, but the same amount of money is still owed. This situation alone is not enough to declare hardship. In general, financial institutions decline requests based solely on numbers because it may represent an attempt to renegotiate loan terms or perform a strategic foreclosure.
A hardship letter needs to explain instead why the person no longer can afford to pay their $200,000 mortgage. It should elaborate on which events made it so that borrowers no longer have the ability to cover payments on time.
Unemployment, medical emergencies, reduced annual income, divorce or family separation, military service and incarceration are some events accepted by financial institutions as severe enough to merit reconsideration of loan or mortgage terms. Families under adjustable-rate loans may also qualify if the rates change significantly.
Writing a hardship letter can be depressing, but it needs to go into detail about your financial problems. However, there are some common mistakes that should be avoided.
People who are about to go through difficult events such as a bankruptcy or foreclosure have a compelling story to tell. A hardship letter should make sure the financial institution understands these difficulties.
In simple but sincere words, the borrower has to explain how things went south and what measures they took to correct the situation. Describing the impact of each event is an efficient way to paint the correct picture. Relying on numbers is important to help lenders understand how severe the situation is and put items such as income loss and negative cash flow into context.
A customer who had to borrow from their credit card to cover payments should explain so in the letter, including detailed information such as the exact amount and credit line source. In some cases, borrowers have to rely on family members or withdraw from retirement savings accounts to stay afloat. These events should be mentioned in a hardship letter.
Some people may feel tempted to end the letter on a positive and optimistic note. However, doing so might have negative effects, as the financial institution will use any evidence of potential recovery as an excuse to deny refinancing a loan or mortgage.
As discussed above, it is important to mention which measures were taken to improve finances, but the person must be clear that all attempts have failed. Otherwise, the bank will ask the borrower to come back later. The purpose of a hardship letter is to show the financial institution that refinancing the loan or mortgage is the only way to guarantee payments.
Before writing a hardship letter, people have to keep in mind that financial institutions only care about getting paid. Protecting your finances is not their responsibility.
As a result, the letter must convince the bank that approving your request is the only way to keep payments on schedule. It may be depressing to write a compelling hardship letter, but if it gives you access to better loan terms it will be worth the trouble.