Qualifying For a Loan Modification: Part III

Unsure what hardship to include in your hardship letter or whether you even suffered a hardship? You may have suffered a hardship without even realizing it. Talk with your spouse, business associates, lawyer, or accountant, and make a list of all applicable hardships. Reconstruct the series of events which, together, have left you in the financial situation you are currently in.

Common Types of Hardship

There are certain common hardships that lenders have accepted as valid reasons to approve a loan modification application. Some of the most common are listed below, but the list is by no means comprehensive. Your hardship may be one of those listed, but it may not. Or you may have suffered multiple hardships. Describe all of your hardships truthfully and in detail in your hardship letter.

• Payment shock. Your mortgage payment went up. You never realized that your payments would adjust to the amount that they have reached. Or you could not reasonably foresee the catastrophic economic effects of the mortgage crisis on the economy: that your home value would fall so much, eliminating the possibility of refinance, and that you would lose so much income as a direct result of the severe economic depression in your business community due to the real estate collapse and its far-reaching effects on lending, liquidity, and commerce generally.

• Job loss, work cutbacks, or pay reductions. Be sure to include your spouse and any person who normally contributes to your monthly household income. Review your pay stubs and hours worked. Gather any and all memos or notices received from your employer or employers. Carefully note income declines over the last two to three years and the events which caused the declines.

• Underemployment. Underemployment occurs when your new job pays less than your old one. For example, you once had your own auto dealership, but you now work part-time at Wal-Mart and 7-11, and your wife babysits in your home. With underemployment, you have the ability to pay but an amount that is less than your normal mortgage payment. That’s all your lender needs--proof of income reasonably likely to sustain a regular monthly payment of a lower dollar amount. In this situation, your lender is better off modifying than foreclosing.

• Declining business or sales revenue. This type of hardship applies if your income has decreased and you own your own business; are self-employed; work for commissions, bonuses, or tips; or earn income in any way other than as a company employee receiving a regular paycheck. Even the soaring price of gasoline, from mid-2007 through the end of 2008, created a downward financial spiral for traveling salesmen as more miles were driven to chase fewer or smaller orders. If this was the case for you, list the numbers--the miles you had to drive, the gallons of gasoline you had to purchase, and the price per gallon. These numbers may astound you.

• Illness or injury. In my experience as a real estate and mortgage lawyer who has overseen over 175+ mortgage and foreclosure cases (and still counting), I have noticed that many of my clients report recent illnesses within their families. There are cancers, heart attacks, suicides, strokes, increased symptoms of diabetes, Alzheimer's disease, and other illnesses. More often, however, there are the undisclosed yet obvious stress-related effects of financial problems: clinical depression, marital estrangement, and increased alcohol and drug dependency and abuse. If there were instances of physical, emotional, or psychological disabilities that existed before the mortgage crisis hit, I have observed a worsening of those conditions often occurs after mortgage payment problems set in. These peoples’ immobility and high medical costs combine to make their inability to pay their mortgages even more problematic.

• Divorce or separation. Divorce is a financial wipeout. If you went through a divorce or separated from your spouse, you have definitely experienced financial hardship.

• Disaster. This includes fires, auto accidents, floods, or any act of God, whether insured, uninsured, or partially insured. These are setbacks to your cash flow and are valid hardships.

• Incarceration or other legal problems. If you or your spouse, child, or loved one was imprisoned or involved in costly criminal or civil litigation, the financial effect is often extreme. This is a valid hardship.

• Overextended credit or overwhelming debt. Many Americans have acquired heavy credit card debt to pay their mortgages and living expenses through lean times. If you have, tell your lender.

If a Loan Modification Isn't Enough

There are many legal options available for people who are struggling with a hefty mortgage, credit card debt, medical bills, etc. Whether it's foreclosure defense, bankruptcy, debt settlement, or another financial solution, you may want to seek the help of an attorney for advice and various legal strategies for dealing with your financial situation. Another thing to consider is filing for bankruptcy. When I have suggested bankruptcy as a viable legal option to discharge debt, people who are in danger of losing their homes have often remarked, “No way! My credit will be ruined." Yes, bankruptcy is bad for your credit rating, but so is foreclosure.

Previous: To review the basic criteria that lenders look for in loan modification candidates, and options to consider if a loan modification request fails, go back and read Qualifying for a Loan Modification: Part I. For a list of the documents you will need to submit as part of your loan modification application and the elements you will need to include in your hardship letter, read Qualifying for a Loan Modification: Part II.