When applying for a short sale, your lender might ask you to write a hardship letter or fill out a hardship affidavit. Read on to learn what a hardship letter is, what the contents should be, and how important the hardship letter (or affidavit) is to the short sale process.

What is a Short Sale?

In a short sale, the homeowner sells his or her home for less than the total debt balance remaining on the mortgage. The lender agrees to accept the sale proceeds and release the lien on the property. The proceeds of the sale pay off a portion of the mortgage balance. Short sales are one way for borrowers can avoid foreclosure. (Learn more about short sales to avoid of foreclosure.)

What is a Hardship Letter?

A hardship letter is a letter that you write to your lender explaining why you are behind on your mortgage payments. The letter should give the lender a clear picture of your current financial situation and explain the circumstances that have led to your financial difficulties.

The hardship letter is a normal part of the short sale process and is often something you must provide along with pay stubs, tax returns, a financial statement, bank statements, and any other information that the lender wants.

Using a Hardship Affidavit Rather Than a Letter

Some lenders prefer that you fill out their hardship form (a hardship "affidavit") or a hardship statement instead of writing a letter, so check with your lender first before preparing a letter.

Hardship Defined

A hardship is a circumstance that is beyond your control that has resulted in a situation where you can no longer afford to make mortgage payments. Hardships that quality for short sale consideration include:

• loss of a job
• death of a spouse
• reduction in pay or work hours
• job transfer
• medical expenses from a serious illness for the homeowner or a family member
• separation or divorce
• an adjustable interest rate reset
• military service, or
• natural disaster.

Contents of a Hardship Letter

Often, people do not spend much time thinking about their hardship letter or they may simply copy a sample letter from the Internet. It is okay to use a template to help you get started, but you should include some personal information that is relevant to your situation.

Here's what your letter should generally include:

Your Contact Information

Be sure to include your name, address, phone number, date, and loan number, and the date on the top of the letter.

Introduction

Start your letter with a sentence that informs the lender of the purpose of your letter. For example, “I would like to be approved for a short sale.”

Body of the Letter

In the body of the letter, state the hardship that has led you to fall behind on your mortgage payments. Explain to the lender what happened and why it was beyond your control. The goal of the hardship letter is to explain to the lender the nature of your hardship and how a short sale can help you avoid foreclosure.

Conclusion of the Letter

To end your letter, let the lender know that you want to live up to the financial obligation of the mortgage, but that is not possible and that a short sale may be your only solution to avoid foreclosure. If you are working with a HUD-approved housing counselor, include the counselor’s name, agency, and contact information. This lets the lender know you have explored all avenues to avoid foreclosure. You can end the letter with a simple statement such as "a short sale appears to be the only reasonable alternative to foreclosure."

Length of the Hardship Letter

The letter definitely should not exceed one page in length—shorter is fine. The letter should be concise, including only the facts that are relevant to making your case.

Mistakes to Avoid in Your Hardship Letter

When you write the hardship letter, don't include anything that would hurt your case. Here are some examples of things you should not include in the letter:

• Do not say that your situation is your lender’s fault or that their employees are jerks.
• Do not state that things are going to turn around for you soon because if the lender thinks you might have the financial means at some point in the near future to repay part of the debt, you might not be approved for loss mitigation.
• Don't mention that you have access to funds that are not shown elsewhere in your short sale application. For example, don't say something like “I could borrow $10,000 from my mother" because then the lender might require a contribution from you before approving the short sale.

Importance of the Hardship Letter (or Affidavit)

With a short sale, the main thing the lender will evaluate is whether or not the amount they will receive in the short sale is as much as they expect to get from selling the property following a foreclosure. If it is more beneficial for the lender to do a short sale and you meet the criteria, you will be approved. The hardship letter (or affidavit) is just part of the process.

Getting Help

If you need help arranging a short sale, consider talking to a foreclosure attorney, a realtor, or a HUD-approved housing counselor.