Your mortgage application must pass an underwriting process before you can get a loan. Lenders require you to explain risky aspects of your credit history and any discrepancies on your application. They request written letters of explanation for late payments, bankruptcies and foreclosures to determine whether circumstances beyond your control led to your financial troubles and whether your credit problems are likely to recur. Lenders may also require an explanation for conflicting information, such as different names, addresses or employers that appear on your credit report. Letters of explanation help lenders make decisions about marginal applicants; however, they don't help applicants with insufficient credit or income.
Review the underwriter's request for a letter of explanation. Your mortgage loan officer or a loan processor who prepares your application for underwriting, can provide you with a copy of that request. It's usually one of several underwriting conditions you must meet to gain full loan approval. Take note of the exact accounts or discrepancies the lender asks you to explain, as you must reference these in your letter.
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Provide the date and a greeting, such as "To Whom It May Concern" or "Dear Sir or Madam." Then introduce the specific account or incident. Use account numbers, dates or words similar to that in the underwriter's request for explanation. For example, "I am writing to explain the late payment reported in Jan. 2014 for credit card account 123456," or "Below is an explanation for each of the name variations that appear on my credit report."
Describe the circumstances that led to your late payment or the causes for the discrepancy. Base your answers on facts, not speculation, assumptions or falsehood. Be specific about events -- job loss, injury, illness, divorce -- and their dates. Also, specify amounts. For example, rather than saying you had to pay "high medical bills," state, "$9,000 in medical expenses to cover doctor visits, prescriptions and lab tests."
Conclude by describing the steps you took to overcome any financial obstacles. This shows the underwriter that the problem won't persist or is unlikely to happen again. For example, you can explain that you saved money and paid off the account after the late payments; that you have saved money and kept up with all new credit obligations since the bankruptcy; or that you have lived beneath your means and saved enough for a down payment and reserves since the foreclosure.
Write "Sincerely," followed by your name. Provide both your name and your spouse's name if explaining a joint credit issue and sign the letter.
Draft separate letters for each of the accounts or inconsistent information the lender is questioning.
Some lenders may ask you to write letters of explanation before submitting your file to underwriting. If so, pull your free credit report in advance at AnnualCreditReport.com to identify accounts or information the underwriter may question.
Provide supporting documentation such as cancelled checks, a pink slip, a divorce decree and other formal documents to back up the letters of explanation.
- CreditInfoCenter: Letter Explaining Late Payments - Applying for Credit, Applying for a Mortgage Loan
- Fannie Mae: An Introduction to Fannie Mae’s Loan Quality Initiative
- Chase: Application Documents: Proof of Your Debts
- Experian: Multiple Name Variations Appearing on Your Credit Report