When you apply for a mortgage, you’ll need to hand over a skyscraper’s worth of documentation: your bank statements, tax returns, pay stubs, details on your debt and more. Depending on your financial situation, your lender could also ask for a letter of explanation. Here’s what that means. Show
What is a letter of explanation?Mortgage lenders ask you to write a letter of explanation in order to better understand your finances when determining whether to approve you for a loan. While your lender’s underwriting department reviews factors such as your credit score and income, those figures might not paint a complete picture of you as a borrower. A letter of explanation helps fill in that picture, offering lenders a deeper understanding of your ability to repay a mortgage. Why do you need a letter of explanation for a mortgage?When lenders review your application for a loan, their goal is to feel confident you’ll be able to make your monthly mortgage payments. Imagine if you were loaning someone hundreds of thousands of dollars — you’d probably ask for concrete evidence that you’d eventually get that cash back, too. If your lender asks you to submit a letter of explanation, the request is likely linked to a specific piece of information in your application that raised a red flag. A letter of explanation is simply a way to help resolve that red flag, which might include:
It might be wise to proactively submit a letter of explanation, especially if you’re aware of a potential red flag. Put yourself in the shoes of someone reviewing your application: Is there anything that might make you scratch your head? Let’s say you took eight months off work last year to help care for an elderly parent. To the lender reviewing your bank statements, you were unemployed. With a letter of explanation, you can help your lender understand that the decision to temporarily stop working was voluntary. This might alleviate the lender’s concerns about another period of unemployment in the near future. How to write a letter of explanationIf you need to submit a letter of explanation, be sure to include all the key details of a traditional business letter:
Letter of explanation templateWhile the format of your letter depends on your circumstances, you can use this letter of explanation template as a example guide: Date Lender name RE: Your Name and Application Number Dear Loan Specialist: I am writing to explain the deposit in my [bank name] checking account of $7,500 on January 3. This deposit was a gift from my father to help cover part of the down payment and closing costs for my home purchase. I am attaching another letter from my father, which states that this is a gift and that he does not expect this money to be paid back. I am available to answer any additional questions and look forward to our expected closing date of April 30. Regards, Your name Your mailing
address If you’ve submitted an application with a co-signer, you’ll need to include the co-signer’s name on the letter, as well. It’s important to note that you can make a letter of explanation more compelling with additional documentation. In the example above, the borrower included a gift letter from their father that supports the claim that the money will not need to be repaid. Whatever your reason for writing a letter of explanation, consider if there are other pieces of documentation that can back up your claim, and if you have them, submit them. Tips for writing a letter of explanationIf you need to write a letter of explanation, there’s no need to panic. Follow these three steps to put together strong support for your application: 1. Be honestThe adage of “the truth shall set you free” can be adjusted to “the truth shall help you get approved.” If your lender asks you for an explanation, it’s crucial to share the facts. “When mortgage applicants find themselves in situations that they feel could negatively impact a lending decision, the best advice is simply to be honest,” Pete Boomer, executive vice president at PNC Bank, said. “It is their best interest to fully disclose to the lender the event or events that could impact a decision to lend money.” 2. Be formalThis letter is not the casual email you send to your colleague about lunch. The recipient holds the keys to a new chapter in your life: becoming a homeowner. With that in mind, approach your letter with a heightened degree of formality. Make your past English teachers proud with pristine spelling, capitalization and business-level construction. 3. Be briefThere’s no need to write a novel. Keep the letter concise, focusing only on the details that need to be covered. Remember that lenders process loads of applications. Rather than make their jobs more challenging with a dense piece of text, focus only on the information they need to review in order to get your application one step closer to approval. Next stepsOnce you’ve submitted a letter of explanation, you’ll have to wait to hear from your lender. Make sure you respond to any additional inquiries quickly. Lenders appreciate borrowers who treat the homebuying process with the importance it deserves. As you’re waiting, make sure you’re prepared for the final piece of the puzzle: the closing. Here’s what you can expect in the closing process. Learn more:
How do I write a letter of explanation for a mortgage credit inquiries?Tips for writing a good letter of explanation for a mortgage. Provide essential identifying information. ... . Keep it brief and professional. ... . Be honest and specific as possible. ... . Include any supporting documentation. ... . Close politely — and proofread! ... . If your first one didn't clearly explain the problem or resolution.. How do you explain credit inquiry?A credit inquiry is a formal request to see your credit report. Also known as a credit check, a credit inquiry is usually made by a financial institution such as a bank or credit card company. Employers, landlords and property managers can also check your credit.
What is a letter of explanation of inquiries?A letter of explanation (sometimes called an LOE or LOW) is a document requested by mortgage lenders when they want more details about your financial situation. An underwriter may request a letter of explanation if they run into questions about your finances during the mortgage approval process.
What do underwriters look for in letters of explanation?Late payments, collections and major derogatory credit problems like foreclosures or bankruptcies almost always require a letter of explanation. Underwriters look at how you've managed credit in the past to determine if you'll be able to afford a new loan.
|