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On a scale from one to exciting, buying a home is pretty exciting. Getting approved for the mortgage, not so much.
Your mortgage lender or underwriter might ask you for a letter of explanation during the underwriting stage of your mortgage application process. During that stage, an underwriter gets into the nitty-gritty of your finances and credit history and decides whether to approve you for the loan.
If you’re asked to submit a letter of explanation, it’s not a bad thing, and you didn’t do anything wrong. It’s an opportunity. It’s a chance to quickly clarify and resolve an issue for a lender or underwriter so they can get back to the business of (fingers crossed) approving you for a loan.
That’s why we’re going to show you how to write a clear and persuasive mortgage letter of explanation. We’ll even show you how to format the letter, so all you’ll have to do is collect the info your lender needs and plug it in.
What Is a Letter of Explanation for a Mortgage?
A mortgage letter of explanation is a formal response to a question from a lender or underwriter.
A lender or underwriter could ask for a letter to explain a credit inquiry, a late payment or a negative mark on your credit report.
At some point in the mortgage application process – after the lender passes your application on to the loan processor, and they confirm that all the necessary paperwork has been submitted – your application moves on to the underwriter. The underwriter meticulously analyzes your finances and gives the lender the thumbs up or thumbs down on your application.
If your lender or underwriter has a question about anything, they’ll press pause on underwriting until they get your letter of explanation. So, it’s in your best interest to get back to the lender as soon as humanly possible.
Why Do You Need a Mortgage Letter of Explanation?
There are a lot of reasons why your underwriter might ask for more information. Here are some common reasons why you might get a request for a letter:
- There are multiple names and/or addresses on your credit report.
- A mailing address on a bank statement or other document is different from your home address.
- If there is no rental or mortgage payment history included with your application, it will signal to the underwriter that you’ve been living somewhere for free. (You’ll have to prove that you make enough to handle monthly mortgage payments.)
- You’ve opened lots of new credit accounts at once or there’ve been a lot of “hard inquiries” on your credit report.
- There are large deposits, withdrawals or transfers from your bank account.
- You’ve had a recent job change, or your income has changed.
- There are long gaps in your employment history or periods of self-employment.
- There are negative items on your credit report, like bankruptcies, charge-offs, missed loan payments, foreclosures, late payments or debt collections.
- There are overdraft fees on your checking account.
- You’ve made money or lost money on a building that sits on the property you’re buying (like a farm), but it isn’t the house you’re buying.
- You’re carrying a lot of debt compared to your reported income.
A lender’s primary job is to confirm that you can pay back the money you borrow. These questions, and any other questions they may ask, will always relate to your ability to pay back the loan. Lenders use your financial paperwork and credit report to help them assess your reliability as a borrower.
The questions lenders and underwriters ask aren’t accusations or personal. For you, it’s an opportunity to clarify your financial situation. For lenders, it helps them verify that you’re not taking on more financial responsibility than you can handle.
How Do You Write a Mortgage Letter of Explanation?
When you get a request for a letter of explanation, put writing the letter on the very top of your to-do list. Every minute, hour or day you wait will drag out the decision on your application.
So, break out your cover letter writing skills and make sure to add these 10 essential elements to your letter of explanation:
- The date: We know: duh! But you’d be surprised how easy it is to miss these small, but important, details.
- Lender’s contact information: Include the lender’s name, mailing address and phone number.
- Subject line: The subject line will begin with “RE:” and your name, loan application number or other identifying information comes after the colon.
- Salutation: Keep the salutation business formal. The standard salutation is “Dear Mr./Mrs./Ms.” with a first and last name.
- Introductory paragraph: Open the letter of explanation with a paragraph that briefly restates the underwriter’s question(s). Be as detailed as you can be here. Include dates, dollar amounts, account numbers, etc.
- Explanation and next steps: Add a short paragraph that explains what’s going on with the issue in question or add an explanation of any issues you may have collecting any requested documents, like a copy of your marriage license, title transfers, a bill of sale, etc.
- Closing: A polite, formal closing like “Thank you,” “Sincerely” or “Best regards” always does the trick.
- Signature: Leave some room for your signature. Under your signature, include your full legal name as it appears on your mortgage application.
- Your contact information: Add your mailing address and 10-digit phone number under the typed name.
- Co-applicant information: If there’s a co-applicant on the mortgage application, include their full legal name, too.
Underwriters are probably juggling lots of loan applications for one or more lenders. Keep the letter clear and concise. And make sure you answered their questions. Put your loan’s identifying information upfront and make it easy to find. That’ll make it easier for the underwriter to connect your letter of explanation to your loan application.
Tips for writing a great mortgage letter of explanation
- Do your research: Collect all the documents you’ll need before you start writing. Save time by not having to search through different file boxes or different parts of your place to find any requested information. Don’t forget to include copies when sending the letter for review.
- Be honest: If you aren’t sure about something, it’s okay to say so. If there are gaps in your paperwork or you need more time to get them an answer, add that to the letter and explain why that’s the case. It pays to be transparent.
- Formal not familiar: Not to go complete high school English teacher on you, but use your business-formal voice for the letter. A letter of explanation is an important document that needs to be clear, not chummy. Remember, the letter could help decide whether you get those house keys.
- Take your time: If you have to, write your letter of explanation in several sittings. Yes, time is of the essence, but the letter needs to be accurate and clear. If you’re waiting on a document or you’re just tired, hop on TikTok, go for a run. Just come back after your break and finish what you started.
- Get a second look: Ask a friend to read the letter. Ask them if what you’ve written is clear and if the voice and tone are right. Pro tip: Ask that friend with strong feelings about Oxford commas to proofread your letter for any typos or mistakes (unless that friend is you).
- Be appreciative: Close your letter of explanation by thanking the underwriter for their attention to your application. It’s not a requirement, but being polite is always in style.
- Confirm receipt: If you mail your letter, give it about 4 – 5 days to be delivered, then check with the lender to make sure the letter was received and landed on the underwriter’s desk.
Remember, the best way to move past this stage is to answer every issue raised as clearly, honestly and accurately as you can.
Feel free to use our sample mortgage letter of explanation as a template.
Mortgage letter of explanation template
February 18, 2022
Very Big Bank
123 Lenders Lane, Suite #456
Dover, DE 19901
RE: John and Jane Doe’s Mortgage Loan Application #123456
Dear Ms. Smith:
I am writing this letter to explain late payments on my credit cards ending in 3456 and 5678 between February and March 2021. In January, I broke my leg and was unable to work for 60 days. As a result, I was laid off from my job. And at the same time, I had to deal with numerous medical bills.
Unfortunately, I was unable to cover my monthly obligations and my medical bills during those three months. Since then, my leg has healed, and I found a new job. I have worked out a payment plan with both of the credit card companies that reported late payments.
I’ve attached several medical bills and a letter from my doctor confirming my assertions. I am also attaching copies of the credit card debt payment plans and recent bills that show both accounts are currently up to date and in good standing.
Please feel free to contact me with any further questions.
John and Jane Dylan Doe
987 Residential Avenue
Lubbock, TX 79416
What if Your Lender Rejects Your Letter of Explanation?
A lender may reject your letter of explanation, but you may have some options to explore.
If your letter was rejected because the issue causing the concern hasn’t been resolved or your answer wasn’t clear enough, you may be able to fix it with a second letter. Ask your loan officer or underwriter what paperwork you need to send in or details you need to provide to further support your explanation.
If your mortgage application wasn’t approved, the letter will include the reason(s) why you weren’t approved. It could be anything from bad credit to having too many delinquencies on your credit report to having too short a credit history.
If that happens, it could be a sign that you need to take some time to work on the issues that caused your lender or underwriter to worry.
You’re Closer Than You Think to Your Dream Home
Do you know what getting a request from your lender or underwriter for a mortgage letter of explanation is? It’s standard and commonplace – and an opportunity. Here’s what it’s not: a rejection.
There are piles of documents that come with assessing whether you’re a good candidate for a mortgage. There is a lot of money at stake for you and the lender. The letter of explanation is a chance to show how invested and financially ready you are to take on the responsibilities of homeownership. Embrace that chance.