On Hardship

A seller must have a hardship in order to be considered for a short sale.  This, despite what anyone tells you, is absolutely necessary.  However baffling it may be, banks are often looking for excuses to reject short sale offers in order to proceed with foreclosure if they cannot get the full balance of the loan from the borrower.  If they cannot see that the borrower has experienced a hardship, they will see no reason why they cannot become and stay current on their mortgage payments.  As such, demonstrating hardship becomes more difficult if the borrower hasn't missed any payments.

There are different aspects of hardship which the bank will be looking for beyond the mathematical demonstration that the borrowers cannot afford their payments.  I'll roughly order them by how impactful and effective they are in the bank's eyes and the probability that they will accept the hardship as legitimate:

• Loss (or "Curtailment") of Income - This is a common occurrence in these recession times, it is also the most compelling type of hardship as it is beyond the control of the borrower.  Loss of income can result from the loss of a job, a loss of available hours, a pay cut, or less opportunities to earn bonuses or commissions which a borrower relies on.  Self-employed borrowers can cite a loss of business as a loss of income.  
• Divorce or Separation - Often times when a couple that owned a property together divorces or separates, the issue of what to do with the house comes up.  If neither can afford the mortgage payment on their own (an situation which needs to be documented and provable) then they may decide to sell the property short in order to go their separate ways.
• Unavoidable Circumstances - There are several of these which may be accepted.  In arguing that it makes for a valid hardship, it has to be argued as necessary and unavoidable.  A prime example would be a required relocation for a job.  In this scenario, the borrower has no choice but to actually leave the property, and they may be left with no choice but to sell it short.
• Damages - It is possible that due to any uncontrollable incident, such as a natural disaster, that the property may be rendered uninhabitable.  Repairs can be demonstrated to be outside of the financial reach of the borrower, making it necessary that they move somewhere more affordable.
• Sudden Necessary Expenses - Expenses which were unplanned and involuntary.  Often-cited circumstances include a death in the family or a sudden illness which would incur funeral expenses or medical expenses respectively.
• Increased or Unmanageable Expenses - This can be the hardest circumstance to argue.  This alone is often insufficient for arguing an actual hardship as the events contributing may be seen as voluntary and not directly related to the ability to pay the mortgage.  A bank will not look so favorably on recent large purchases, failed investments, or high credit card bills as they see these as within the borrower's control.

It is important to note that a hardship cannot simply be that the house is underwater - worth less in the current market than what is owed.

As an essential part of the short sale file submitted to the lender(s,) there needs to be a hardship letter which outlines the contributing factors of hardship in an effective manner.  The best hardship letters have specific dates of when circumstances arose and actual figures which outline changes in ability to pay.  Also, always remember to sign and date your letter to the bank.