What Constitutes Hardship for a Loan Modification?

Most programs developed by the Obama administration and mortgage lenders require the homeowner to demonstrate a ‘hardship’. A hardship is the term lenders use to differentiate between a homeowner whose situation has changed and needs help to avoid foreclosure versus a homeowner that would just like to save some money on their mortgage payment.

But what exactly is a hardship? Ask yourself two simple questions. If it’s hard to make your payment today, could you do so if it was lowered substantially? And secondly, what has changed between today and the day you first applied for your loan? If your income has dropped, or your expenses have gone up, you’re probably eligible for a loan modification.

With one out of eight borrowers behind on their payments, lenders are more flexible than ever before in accepting a hardship. Foreclosures are expensive. It makes sense for a lender to keep your home on its books as an asset generating even a reduced return, compared to taking it back and getting stuck with an REO – real estate owned – property.

So what constitutes hardship?

  • The most common is simply that your ARM – adjustable rate mortgage – has reset making it difficult to maintain your now significantly higher payments.
  • A job loss of either spouse justifies applying for a loan mod. Note that you have to show some income to get a mortgage payment reduction approved. Unemployment insurance by itself is not generally sufficient, although the Obama plan is starting to take that revenue stream into account under its terms.
  • Reduced income is a problem afflicting many of us today, especially those who own their own businesses or who work on commission.
  • An increase in financial responsibilities is another good reason. Have you been faced with additional medical expenses such as a rise in your health insurance premiums? Has the interest on your outstanding credit card debt zoomed up? Have you had to replace your car? Have your adult children moved back in with you? Do you now have to help support an elderly parent?
  • The death of a spouse or co-borrower is cause to apply.
  • Divorce or separation strains a family’s finances. Let the lender know what you are confronting.
  • Military duty almost always means an income reduction. Active duty servicemen and women are protected by the Servicemembers’ Civil Relief Act.
  • Property damage, due to a natural disaster can strain a borrower’s finances. If you’re in a declared disaster area, you could qualify for low-income loans for repairs.
  • Incarceration of a borrower and the subsequent income loss is a reason to apply.

Be sure to write-up your justifications and put them in a hardship letter. Speak simply and from the heart. You’ll also have to show your income and expenses. A lender must be convinced that a reduction in interest rate will keep its mortgage in good standing by allowing you to keep paying. (Under FAQs we have compiled a complete list of the documents you’ll need to provide.)

Remember, every time you skip a mortgage payment, it’s a black mark on your credit report. Obtaining a loan modification will have less of on an impact on your score.

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