Second Missed Payment: Lender attempts to contact a borrower to discuss missed payments.

Third Missed Payment: After the third payment is missed, lender sends out “Demand Letter” or “Notice to Accelerate” letter. Most banks will allow 30 days to bring a mortgage current or barrower’s attempt of some type of payment arrangement or reffer to foreclosure assistance resources.

Fourth Missed Payment: Borrower is nearing the end of time allowed in the “Demand” or “Notice to Accelerate” letter. If payment is not made or borrower did not work out an arrangement, case is referred to lender’s attorney. All attorney fees become part of a delinquency amount.

Sheriff’s or Public Trustee’s Sale: This is the actual day of foreclosure. Home owner may be notified of the date by mail and the sale may be advertised in a local paper. The time between the” Demand” or “Notice to Accelerate” letter and the actual sale varies by state. In some states it can be as quick as 2-3 months. Borrower has until the date of sale to make arrangements with a lender, or pay the total amount owed to stop foreclosure.

Redemption Period: After the sale date borrower may enter a redemption period. Redemption time frame is given on the same notice that state uses for your Sheriff’s or Public Trustee’s Sale.

Judicial VS Power of sale Foreclosure

All 50 states allow Judicial Sale, while only 29 allow “Power of Sale”. Majority of lenders will include “Power of Sale” clause into agreements if allowed by the state law. Power of Sale is faster than the judicial foreclosure.

Judicial Sale Foreclosure:

• The mortgage lender will file suit with the local court system.
• Borrower will receive a letter from the court demanding payment.
• Typical 30 day period is allowed for a response and a payment to avoid foreclosure.
• At the end of the 30-day period, a judgment is entered and the lender requests sale of the property by auction.
• The auction is carried out by the sheriff’s office, usually a few months after the judgment.
• Once the property is sold, borrower is served with an eviction notice by the sheriff’s office, and must vacate the home immediately.

Power of Sale Foreclosure:

• The mortgage lender will serve borrower with papers demanding payment.
• After an established waiting period, a new deed of trust is drafted. This document temporarily conveys the property to a trustee.
• The trustee will sell the house at public auction for the lender.
• Many times, power of sale foreclosures are subject to judicial review to ensure legally of proceedings.
• Typically lender is required to post a public notice of sale for the auction.

Both types of foreclosure require that any other involved parties be notified of the proceedings. For instance, if you took out another loan against the house with a third party, that lender must be contacted and its loan amount must be paid from the auction’s proceeds. If the third-party lender isn’t paid, it can apply the mortgage to the new property owner. Many times, the lender will actually buy the property back and attempt to sell it through the real estate market at a later date.

In some cases if the sale of the property doesn’t satisfy the amount of the loan, deficiency judgments are made against the borrower. The entire amount of deficiency may be required, although some states only require the difference between the fair value of the property and the loan amount be paid.

Only Connecticut and Vermont allow almost obsolete procedure called strict foreclosure. In these cases, once judgment is made on the lawsuit, the property is automatically assumed by the mortgage holder.

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Why? (…are you writing a hardship letter)

This should always be a first paragraph. It is an opening to all future dialogs with the lender Loss Mitigation Department. Nobody cares if your dog broke a leg and you spent all the money on your vet bills. Your job is not to seek sympathy; your job is to explain (within one or two paragraphs) why the amount of money coming in, is less to the amount of money going out. It’s that simple.

A good example of an opening paragraph would be “I am contacting you today to request a loan modification (short sale, reinstatement, whatever) and explain the circumstances that have caused us to fall behind on our mortgage (line of credit, credit cards, etc)”. I like this opening statement because it achieves two major objectives. First, you are letting them know there is a solution, even though it hasn’t been presented to you yet. Second, you are planting the seed of an alternative –a better option for your lender to consider.

Continue the conversation by providing a more detailed summary of “Why?” you’ve missed the payments. Be careful not to trap yourself inside your explanation. What I mean is don’t give details such as “I used to make $ 756.75 per week and now its $543.92”. A better way would be “The industry I’m employed in, experienced a significant slowdown. My employer in particular, reduced its workforce by 20%. I’m thankful for having  seniority, which has allowed me to continue my employment, although my work hours have been significantly reduced”.

In most cases, I would recommend tailoring examples from above as an opening part to any hardship letter. Modify the statements as you wish to fit your particular situation, and avoid irrelevant information. Remember the person reading your letter has heard it all, from clever to downright stupid. So keep it brief and to the point.

What? (…are you proposing in a hardship letter)

Please note that facts in this section will ultimately lead to the amount of final settlement.

Tell the reader EXACTLY what you are looking for. Well, maybe not exactly. The objective is to let the mitigator know a solution that will work for you.

For example, let’s take loan modification. Saying something like “if you will reduce my monthly payment by X amount…” may prove to be counterproductive. Your goal is to steer the adjustor into proposing the lowest possible payment.  By giving specific numbers you are potentially limiting yourself from getting a better deal. All you know is that lower payment will help. You also know that X amount is what you are looking for. So leave it at that.

Negotiation is an art, and the letter of hardship certainly falls into that category. Trapping yourself from the beginning into something rigid, like X amount, is a big mistake in any negotiation strategy. Enough has been written on that subject, so I’ll spare you “IMHO” and back to the letter.

Suggesting a path to resolution, is the message you want to convey. Simply write “Constant strain from exorbitant mortgage payments, has made it impossible to provide basic necessities for my family. Reduced work hours, combined with recent mortgage rate increases has caused me to fall behind on payments”.  It’s simple and to the point.

For some people, this is the hardest idea to grasp. The bank’s objective is to avoid the worst case scenario, which is foreclosure. It’s not to say that you will get the red carpet treatment. You will however, be presented with options, so it’s always better to let the bank give you the numbers first. There will be plenty of opportunities to negotiate actual numbers once the dialogue is open. The hardship letter is simply the first step in seeking a solution.

How? (…your poposition will solve the problem)

As you are writing this letter, think about why are you writing this letter? The point I’m making is that you are in this unfortunate situation because  payments were missed. The credibility has been damaged. Will get back to this point a little later…

The mitigator’s job is to assess a number of factors. On the contrary, the “mitigator” title, his / her job is to reduce bank’s losses. Having a bullet proof “How?” is the key to working out the deal. The temptation to provide actual numbers or terms should be avoided. Instead, suggest how lower payments will allow you to keep up with ALL obligations.

Keep it brief and make sure reduced payments (or whatever else you are seeking) will indeed solve the problem. If all your payments equal your income you’ll never make it. There always going to be that unexpected expense, and last thing you want is to fall behind again. Don’t overlook the importance of working out the deal which will provide you with  a little money for the unexpected.

My view is that adjuster will pull an updated credit report and see that $400 credit card payment, that department store card, that auto loan with 37 payments remaining. There is no need to provide the specifics in the actual letter. Instead include a separate spread sheet containing money in / money out statement.

Now, back to credibility. The single most important factor that is considered by a lender is a likelihood of this loan going back into default. I encourage you to read the previous sentence again.  Did you read it? Now think about it, here you are with missed payments, other debt and lower income asking a lender to refinance the loan. Are you out of your mind?

Well, you’re not! Millions of consumers have been able to get out of high interest loans, reduce their balances, and  keep their homes.  Structuring the Hardship Letter in a precise, easy to read form, will give you an edge, but addressing the why, what and how, will give you credibility with the mitigator.

Below are downloadable FREE HARDSHIP letters samples you may use. Just remember to put you name instead of “Your Name Here”…

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