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How to Write a Hardship Letter That Gets the Bank to Say, "Yes!"
A well-crafted and ironclad hardship letter is probably one of the biggest components to getting a short sale approval from the bank. Without clear description of the dire straights the borrower finds themselves in, no lender will willingly short the loan. So how do you go about writing a letter that will get the banks attention? Whether you are writing your own letter or helping a homeowner write a letter, here are some things to consider:
1. The Reasons for the Hardship
Be CLEAR about what your hardship reasons are! It could be a number of things, including (but certainly not limited to)
- Loss of a job
- Illness
- ARM adjustment
- Property tax hike
- Divorce
In any case, you first need to compile and assess what the most compelling reasons for hardship are. Put yourself in the bank's position as a lender. If there is a way you can make the mortgage payment,they are not going to allow a short on the loan. So be very clear what circumstances have are making it impossible to keep up with the mortgage payment.
2. Be Specific about your Hardship
Once you have established your reasons for hardship, you need to put in the effort to understand how that hardship has impacted you specifically. For example;
- Job loss, and family income has dropped by $2400 per month
- Medical Bills due to "X", which total over $50,000
- A divorce which puts child support and alimony burdens of $1200 per month
- My ARM has increased my mortgage payment by $800 per month
Secondly, you need to demonstrate how this hardship impacts your ability to make a mortgage payment. If you make $8,000 a month and your mortgage went from $1000 per month to $1500 per month; good luck getting them to approve a short sale! You need to show how the hardship pushed you outside of your ability to make the payment.
Banks often think of mortgage payments in terms of percent of gross income, so you might consider using this. Let's demonstrate with an example. Assume your mortgage payment is $1700 per month. Your household income was $5000 a month and then you lost your job, and the new household income is $2200. This means that your mortgage payment went from a reasonable 34% of your income to a whopping 77% of your income. Any bank will look at that number and say, "Yikes!"
3. Gather supporting information and Market Conditions
Think about circumstances outside of your own that are impacting your market area. Remember, the bank will want to be certain other options have been exhausted – such as selling your house. You will need to show that this is also not an available option. This can be done by doing things like:
- Showing a recent appraisal of your home
- Understanding comparable sales and the general market in your area
- Itemizing pieces of disrepair on the house that negatively impact the properties market value (i.e. an old roof or broken A/C unit)
- If the house is on the market, how long it has been one
4. Writing the Letter
ONE PAGE ONLY! Make sure you keep it concise – no lender wants to read a 4-page hardship letter. Get it into a single page!
Keep it in easy to read paragraph format.
The layout of your letter should look something like:
- At the top of the letter, put the bank's name and address. You might want to address it directly to the loss mitigation department. Each bank has unique ways of handling transactions so it helps to do some research ahead of time.
- In the RE: line, put in "Request for Short Sale", and your loan number
- Your first paragraph should describe what happened briefly and make it clear you are unable to afford the mortgage. Don't be ambiguous here – you can't afford it!
- RIGHT: "My family has gone through significant hardships recently that make it impossible for me to afford my mortgage.
- WRONG: "I recently lost my job and we have had to cut out cable TV and gourmet dinners…. it's getting really tough to afford our payments!
- Your second paragraph should talk about the market conditions that have driven down your home value
- 3rd and possibly 4th paragraphs are details, details, details. Use the information you gathered up above to make your case more clearly.
- Closing a- restate that you cannot afford the mortgage, and there are no other options besides a short sale.
- Make sure to sign and date the letter, and include your own contact information.
5. Distribute!
Send the letter to the appropriate party (bank, attorney, investor, or real estate agent you are working with).
Once the letter is with the bank, you can feel confident that you built the best possible case towards convincing the bank to accept a short sale!
What do you think?
Do you have other tips or advice on what makes a successful letter? Go ahead and share in the comments!
About the Author
About Short Sale Artisan
Nick Reuter is the owner of Short Sale Artisan, a web-based short sale platform that helps agents and investors on top of their workflow by quickly and easily calculating offers, generating documents, finding new leads, secure financing, and much more.
Visit Short Sale Artisan today and view our demo video for more information!
You can also subscribe to our Art of Short Sales Blog for the best short sales news and information!
Is it wrong of me to laugh myself sick at the French?
PARIS (Reuters) – Hundreds of thousands of teachers, nurses, factory workers and plumbers marched through French cities on Thursday to demand pay rises and protection for jobs.
"This crisis comes from the United States, it's the financial bubble that is bursting. It's not for the workers to pay for that," said Charles Foulard, a technician at a refinery run by energy giant Total.
no, its the French
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Jobs take the strain as capital costs climb
The Key to Successful Short Sales Transactions - Understanding Motivations
We have spent a lot of time talking with our users over the past year about what works (and perhaps more importantly, what doesn't work!) when managing your short sale pipeline. One of the key differences between successful investors and agents and ones that struggle (and a key factor in improving your successful closing rates) is quite simply putting yourself in all involved parties shoes and finding common ground. You need to think about the motivations of the bank or lender, the homeowner, the real estate agent, the buyer(s), and any 2nd lienholders that drive the decision making process. Understanding how these motivations conflict with each other will help you find common ground to get deals closed.
Let's run through them one by one!
The Bank or Lender (Primary Lienholder)
This is it – the big kahuna. The bank has the keys to the castle, so don't underestimate their motivations when it comes to a short sale transaction. The bank's short sale decision making process is driven by a single factor – money. Remember – the bank's ideal situation is that you continue to make your payments on the agreed-upon schedule. This ensures that they make the interest on the loan and get the balance paid in full.
Let's circle back to motivation. What motivates the bank to accept a short sale offer? If you guessed $$ Money $$, you are right! It's a bit of an inverse situation though – banks get into loans expecting to be repaid the principal balance plus interest. In this case, you are asking them to take less money – and the only way that is going to work is by demonstrating that the alternative is even MORE less money. In other words, the burden of proof is on you to motivate the bank to accept your offer by proving to them that their financial position will be worse if they do not accept the short sale. This is typically done by carefully explaining to the bank what the outcome will look like if they go all the way to foreclosure, and then additionally proving that foreclosure is imminent.
So, let's recap on how to motivate the bank -
- Prove that foreclosure is a more financially damaging than a short sale and back it up with evidence! (See screenshot below)
- Prove that foreclosure is imminent and cannot be prevented and back it up with evidence! ( A good short sale hardship letter helps)
The Homeowner
The homeowner is in a different situation. They are falling behind on their payments, are hopelessly underwater, and it appears to them there is no way out!
Similar to how the bank is mitigating their losses in a short sale, the homeowner also wants to mitigate the damage to themselves and their families. The motivating factor for a homeowner to pursue a short sale is getting themselves out of a bad situation that is going to get worse. The interesting thing about a short sale from a homeowner's perspective is that, unlike a typical home sale transaction, the homeowner / seller really does not care any more about the sale price of the house. This is because they are already underwater – and to them, getting out of $50,000 or $75,000 really isn't significant – it is the getting out that is significant.
The only time that changes is when the lender is looking for the homeowner to assume a deficiency judgment. In that case, the homeowner will still be motivated to minimize the loss, since they will be responsible for it after the sale completes.
Use the homeowner's motivation to get out of their situation to get them to play their part in the transaction – including providing necessary supporting documents about their financial situation and a good, strong hardship letter. It is best if you can negotiate away any deficiency judgment (HAFA properties will automatically have no deficiency) to keep the motivation of the homeowner strictly on leaving the property – but recognizes this directly conflicts with the bank's motivation – money. Our recommendation in this scenario is to try to work for the homeowner's benefit – carrying a deficiency without having any asset to back it up is not a fun situation to be in.
The Realtor
Like any real estate transaction, realtors want to close the deal and make commissions (under the guidelines of NAR or other realtor ethics codes). It's their job, after all!
A motivating factor for agents is most certainly the time involved in a transaction. Time is money, and many real estate agents despise working with short sales because (yes, it is true) they take more effort than a standard transaction. Being in the middle of a real estate transaction is enough work, now you have to throw in the multi-month bank approval process and due diligence phase and deal with additional red tape, for the same commission.
Motivating realtors, then, can be done by improving their processes or saving them time. If you are the real estate agent, then your motivation should also be to save more time. If a particular home nets you a commission check of $2000, and it took you 30 hours to make it happen, vs. 60 hours for a similar check on a short sale, you worked for half the rate on the short sale! ($66 an hour vs. $33 an hour, respectively).
How do we improve time? By building efficiencies and work flows into the process, especially for repetitive tasks. Short sale software like Short Sale Artisan is certainly one way to improve efficiencies. So is a simple spreadsheet. Another one is simply making win-win situations right off the bat by reading blogs like this and understanding how to meet the motivations of the parties involved in a transaction to improve both rate of a successful close as well as reduce the effort needed for each transaction.
Another motivating factor for agents is simply business. They just want business – quantity is important! Even if agents do not like short sales, the bottom line is being a successful agent in today's market depends on understanding and working the short sale process successfully. If you want to have a good pipeline of work going, then you need to include short sales in your portfolio.
The Buyer
The buyer's motivation is the same in a short sale transaction as a normal transaction – it is all about getting the best price! Whether the buyer is an investor looking to eventually flip the property or a family looking for a place to live, the price is what matters. Many buyers are attracted to short sales and are motivated to work through one despite the onerous timelines and red tape simply because they often represent a good deal.
We again have a conflict here – the conflict that in a normal transaction exists between the Buyer and the Seller, in a short sale transaction is between the Buyer and the Lender. In a short sale, the buyer still wants the lowest price possible, but this time the lender, not the seller, wants the highest price.
Like any other real estate transaction, keeping a buyer motivated depends on their needs. For a family, it might be demonstrating a property to be a good family home, in a good neighborhood, or demonstrating a great value. For an investor, it might be demonstrating the ability to improve the value of the property and resell it at a future point in time, or keep it and rent it out. In any case, there is really nothing unique with the motivations of an end buyer in a short sale transaction to differentiate from your typical transaction.
The 2nd Lienholder or Subordinate Lender
The second lienholder, if there is one, has the exact same motivation as the first lender – money. So the same rules apply. The only additional wrinkle with the 2nd lender is that their "loss" in a short sale is typically much more than the first lenders. For example, a second lienholder may have a principal balance of $25,000 and only expect to recieve $1000 at closing – a measly 4% of the principal balance in such an example.
This is why the case needs to be ironclad that foreclosure is imminent (in which case, the 2nd lienholder would get nothing). The bottom line though: if there is any doubt as to the validity of the hardship, a $1000 check may not be enough to keep the lender motivated to accept the terms of the short sale arrangement. So it is doubly important to make your case well to these parties!
Keep the motivations of everyone in mind
The bottom line: when handling a transaction, you are effectively juggling the motivations of all parties involved in the short sale transaction. Keep that in mind when you are dealing with individuals, and you will close more deals and be able to find common ground when disputes occur quicker. Flexibility and some political posturing apply!
What are your thoughts on motivations and how to use them to inspire success? Post in the comments!
About the Author
About Short Sale Artisan
Nick Reuter is the owner of Short Sale Artisan, a web-based short sale platform that helps agents and investors on top of their workflow by quickly and easily calculating offers, generating documents, finding new leads, secure financing, and much more.
Visit Short Sale Artisan today and view our demo video for more information!
You can also subscribe to our Art of Short Sales Blog for the best short sales news and information!
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RIA's Complete Analysis of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, RIC Modernization, and Other Late 2010 Tax Provisions $12.89 ... |
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RIA's Complete Analysis of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, RIC Modernization, and Other Late 2010 Tax Provisions ... |
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