A mortgage lender may cancel your debt in exchange for your house keys in a foreclosure-prevention program known as a deed in lieu of foreclosure. It may require a hardship letter explaining your need to give up ownership of your home. A deed-in-lieu is usually a last resort, and you must exhaust the alternatives, such as a loan modification or a short sale, in which you sell your home for less than the mortgage owed. A few key points in your letter will help the lender determine whether foreclosure is imminent and a deed-in-lieu is the right option.
When Less Is More
Providing too much information in a hardship letter can raise red flags with the lender. Give the lender only necessary facts that establish your financial situation without providing details that may compromise the deed-in-lieu.
A high volume of hardship letters may mean that a lender's representative has only enough time to read the first several lines of your letter. Brevity is key, and your letter should get to the point right away. Open the letter by explaining the reason you stopped making mortgage payments. Specify your hardship; it should be a circumstance beyond your control, such as job loss, underemployment or serious illness.
Explain Steps You've Taken
You usually must attempt a refinance, loan modification or short sale of your home before a lender will consider a deed-in-lieu. Your hardship letter should specify steps you've taken to fix the default. Using your savings to pay the mortgage, being denied a loan modification, putting the home on the market for several months but failing to find a buyer or gain short sale approval are all measures worth mentioning. Briefly explain what went wrong in your attempts to lower the mortgage payment or sell the home. Also, clearly state that you are requesting a deed in lieu of foreclosure as a result.
Hardship Letter Don'ts
An effective hardship letter will show the lender that you have not recovered from your financial hardship and that you're unlikely to afford payments in the near future. Establish that it's better for you to move out of the home through a deed in lieu of foreclosure than to prolong your stay and undergo foreclosure proceedings. The letter should not convey in any way to the lender's representative that the default was intentional, that you are trying to take advantage of a declining market or bad economic conditions or that you simply want out of your mortgage.
Multiple Liens Can Complicate Things
A lender is less likely to approve a deed in lieu of foreclosure if your home has several liens other than the mortgage. A second loan, home equity line of credit, tax lien or homeowners association lien against the property title make it more difficult. You don't need to explain additional liens on the home, as your lender already has access to the title details.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.