The Importance of a Good Hardship Letter When Applying for a Loan Modification

A hardship letter is used to explain the financial circumstances preventing you from continuing with your current loan payments. This letter will be provided to your current lender in an attempt to obtain a modification of the loan and ultimately a reduction in payments. Modification may mean a refinance, change in schedule for payments or even a deferral. In any case, the information you provide will be the stimulus for action by your lender.

Importance of a Hardship Letter

Your existing lender will not want to modify your loan. In fact, a loan modification will cost the lender a large portion of the profits it expected to receive from your payments. Even if you agree to pay the full amount of the loan but simply extend its life and make smaller monthly payments, the lender is looking at a short-term loss of profit. Because modification ultimately favors the borrower, a lender will need a solid reason to pursue this agreement with you.

The hardship letter provides them that reason. It is your chance to tell the lender why they should accept your offer to repay the loan on new terms. Essentially, you need to show the alternative is much worse for them, and you need to do this convincingly.

Elements of a Hardship Letter

The elements within your hardship lender will be the basis of any modification consideration. In order to succeed, you should cover the following points:

  • You made an honest effort to repay your loan at the existing terms. This means you have not missed payments in years past and have been a responsible borrower for most of your loan term.
  • There is an immediate financial circumstance preventing you from keeping up with your payments. This may include the loss of a job, an expensive medical need or unfortunate situation like a divorce.
  • The emergency you are facing will not be disappearing in the near future. If there is a chance your circumstances will change within 30 days, your lender is a lot less likely to modify your loan.
  • The alternatives to modifying directly with the lender now will result in a greater financial loss to the lender. For example, without modification, there is a risk you may have to declare bankruptcy, in which case the lender has no guaranty of recovering any money from you at all.

Hardship Letter Alternatives

If the above circumstances are not true or our hardship request is denied, you still have options moving forward. These options will be less favorable to you. One option is to take a new loan from an external lender. You can use this loan to pay off your existing debt. The new loan will hopefully be more affordable; this is commonly referred to as a loan refinance. Along the same lines, you can use an external loan to settle or consolidate your debts. In all of these scenarios, your current lender will report that you modified the loan with them against their requests. As such, your credit score will drop. You will also be asked to pay penalties to the initial lender, making this a more expensive route to achieve a modification.