When mortgage underwriters ask hopeful homebuyers for a letter of explanation, it can cause panic. Many homebuyers think it might cause their home sale to fall through, but it actually can be a good thing. The right letter of explanation can actually help you get financing, even if you’ve had credit problems in the past.
When you know what a mortgage application letter of explanation is and what it’s for, you can write one with confidence. If you’ve had problems with your credit or accounts, this is the time to explain them. The right letter of explanation with your mortgage application can make or break your mortgage approval.
How to Write and Use a Letter of Explanation in a Mortgage Application
What Is A Letter of Explanation?
A letter of explanation is a brief message to your mortgage underwriter or bank explaining something about your finances that either doesn’t make sense or is outside the norm. Since the housing bubble in 2009, mortgage underwriters must now use stricter standards to determine lending, which means anything these standards must be explained. This is where the letter of explanation with your mortgage application comes in.
It’s important to remember that a mortgage application letter of explanation is not a way to stop you from getting a mortgage, it’s the opposite. The letter is intended to explain problems on your record which might otherwise prevent you from getting the mortgage. This is only one of many documents needed for mortgage approval, and all are required to get an accurate picture of your finances.
When Would I Need A Letter of Explanation?
There are many circumstances where an underwriter might ask for a letter of explanation. Many of these have to do with late or missed payments, low credit, former addresses, or large, unexplained deposits.
The following are some of the common reasons a letter of explanation might be required with your mortgage application.
- Late or missed credit card payments, rent, car payments etc.
- Ownership or interest in a property not listed, such as in a trust
- Unexplained deposits
- Unexplained debts, either previously paid or unpaid
- A joint bank account with someone not listed on the mortgage
- Bankruptcy or dissolution of a business
- Loan default
How Do I Write A Letter of Explanation?
You can write a letter of explanation for your mortgage application yourself, or you can ask a broker, loan officer, or real estate agent to give you some guidance. Letters of explanation shouldn’t be long or complicated. The letter should state only the facts around the circumstances in question. It should explain what happened, why it wasn’t caused by financial mismanagement, and how the situation was resolved. With the letter, you should include any proof of the facts stated.
For example, if you had missed payments due to hospital bills or because a family member was injured and out of work, include copies of the hospital bills. Here is what a mortgage application letter of explanation might look like in this case;
"February 9th, 2018
To whom it may concern,
I am writing this letter in regards to the late credit card payments from May and June of 2015. I was hospitalized in April, 2015, resulting in $15,124 in care and recovery expenses. I was required to prioritize hospital payments in order to receive care, which resulted in late credit card payments. After resolving the hospital expenses, I returned the credit card accounts to current status in July, 2015. To prevent this problem from happening again, I have opened an emergency savings account. I have attached the hospital records and credit card statements for your review.
Your Mortgage Application Letter of Explanation
Each person’s situation is different, and therefore each letter is different. Make sure to include all the necessary facts, and be as accurate and to-the-point as possible. Remember that, though mortgages are initially reviewed by computers, they are ultimately approved by real humans who do understand unexpected or tragic events happen. With the right letter of explanation with your mortgage application, you can prevent these circumstances from hindering your home purchase.
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