The Short Sale Hardship Letter: What Is It? Why Is It Important? How Do I Write It?

“Short sales” continue to grow in number and now — with REOs — represent a substantial portion of the real estate market. When seeking a short sale, the owner will invariably be asked by the lender to submit a “hardship letter.” Owners should make the hardship letter as compelling as possible, while — needless to say — remaining honest and accurate.

(For more about short sales, see “What is a Short Sale? The Short Sale Process In Washington Explained”. For more about REOs, see “REO or Bank owned Homes Explained: Buying REO Property“.)


First, some background: When a lender considers a short sale, it must take into account both the big and the little pictures. As to the little picture — the specific proposed sale — the bank will probably benefit from any short sale that is even close to fair market value of the property. Otherwise the bank will have to foreclose on the property, only to probably take it back at the foreclosure auction. The bank will then have to sell the property itself. All the while, until the property is actually sold and the bank recovers the principal (or a portion of it) the bank is incurring a loss based on the “time-value” of money. Plus, the bank incurs substantial costs in the foreclosure process and again in selling the property to an eventual buyer. These costs are avoided if the bank approves the short sale.


On the other hand, the bank also has a big picture concern as well. Quite simply, the bank wants to strongly encourage borrowers to remain good for the debt if they can afford it. Otherwise, the bank — all banks, really — will be even more overwhelmed with defaulting borrowers.

Accordingly, a bank will typically approve a short sale only if the owner has some sort of hardship that makes it difficult or impossible to make the mortgage payments. That is why banks require a hardship letter when requested to approve a short sale.

Thus, a hardship letter is a written statement from the owner about why the owner cannot afford the mortgage. While short sale standards vary from lender to lender, and while they also evolve over time, the hardship letter is generally an important part of the short sale application. Any owner looking for an approved short sale should take the time to draft a compelling hardship letter.


In drafting the letter, think creatively. Identify any possible hardship that has had a negative impact on your ability to pay the mortgage. Have you lost your job, or are you about to? Has somebody in your family incurred substantial medical bills? Is there any other unusual or unanticipated expense that impairs your ability to make the mortgage payment? Play up those hardships.

That said, there are of course limits. It is a very serious federal crime to make a false statement to a bank. Accordingly, while you can “play up” a hardship, you cannot lie or misrepresent the truth. Its a fine line, and its important to remain on the right side of it.

If you take the time to write a well thought out and compelling hardship letter, you will be taking a big step towards a successful short sale.

As always, this post is NOT legal advice. For legal advice, you must consult an attorney about your specific situation.


Posted by Marc

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