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After your mortgage application, the lender will assess your application and your financial documents to verify that you meet their loan approval requirements.

If the lender finds information that raises red flags, they may ask you for a letter of explanation to shed light on the issue – whether it’s an employment interruption, a derogatory note on your unusually large credit or deposit in your bank account. .

Here’s what you need to know about cover letters, including how to write one:

What is a letter of explanation for a mortgage loan?

A letter of explanation is your opportunity to explain inconsistencies in your mortgage loan application and all the aspects of your financial history that your lender needs to better understand before they can approve you for a loan.

After requesting a mortgage, your application goes through the subscription process. The underwriter examines your credit history, employment, tax returns, assets and debts in detail to ensure that the information is complete and accurate and that you have a low risk of default on the loan.

If anything arises that could disqualify your claim, the underwriter may request a letter of explanation to help better understand the specific details of the problem.

Advice: The subscriber will verify your credit scores, employment and other items shortly before finalizing the loan. Any changes since loan approval may require an explanation before the lender authorizes your loan to close. So it is best not to change your finances until you have completed the home buying process.

If you’re looking to buy a new home, Credible can help you compare prequalified rates from all of our partner lenders in just minutes. It’s simple and secure – and you don’t even have to leave our platform.

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  • Instant simplified pre-approval: It only takes 3 minutes to see if you qualify for an instant streamlined pre-approval letter, without affecting your credit.
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Why you might need a letter of explanation

Just about any aspect of your loan application may require a letter of explanation, but most requests are for credit, employment, cash reserves, or fraud protection.

Here are a few things that might prompt your lender to request a letter of explanation:

Derogatory items on your credit report

Previous credit issues may prompt you to ask for a letter of explanation because they suggest that you have been having difficulty managing your debt. These problems include:

  • Late payments
  • Collectibles
  • Landfills
  • Bankruptcy
  • A short sale or foreclosure

Excessive credit requests can also be a red flag if they cause the lender to suspect that you bought credit because you had trouble getting approved.

To find: Can You Buy a Home With Bad Credit?

Unusual or inconsistent work history

You will need at least two years of stable employment, either in the same position or field, to prove that your Income Is reliable. Some circumstances that make you appear riskier in the eyes of the lender include:

  • Job losses or periods of unemployment
  • Self-employment
  • Frequent job changes
  • A new job in a different field

Buy a home away from your workplace

If your new home is more than 80 kilometers or so from your workplace, your lender might suspect that you are buying a second home or investment property rather than a primary residence.

Lending standards are stricter for non-primary residences, and interest rates are generally higher.

Lack of rental history

Lenders like to see a history of on-time rent payments for at least the past 12 months for first-time buyers. This is because inexperienced tenants may not be ready to suddenly take on a mortgage payment.

Bank deposits, withdrawals or large transfers

Lenders like money in borrowers’ checking and savings accounts to be “seasoned and sourced,” which means that the money has been there long enough and its source is apparent enough to show that it has grown. is your money versus gift money or a loan that you will have to repay.

Conversely, large withdrawals can cause the lender to think that you are in a bind.

Inconsistency in mailing address

Address discrepancies on a loan file are considered “high-level red flags” for mortgage fraud, warns Fannie Mae.

The lender will need a letter of explanation if they find any inconsistencies in your identification documents, such as a different address listed on your credit report than on your bank statements and tax returns.

Learn more: Credit Monitoring: Why You Should Get A Credit Monitoring Service

How to write a letter of explanation

It’s best to keep your cover letter short and sweet. Include as much detail as needed, but only address the specific information requested by the lender. The idea is to make it easy for the subscriber to find the information they need.

Your cover letter should be pragmatic in tone and structure. Here are some of the things mortgage experts recommend that you include in the letter:

  • The date you write the letter
  • The name, mailing address and telephone number of the lender
  • Your full legal name and loan application number
  • Your explanation, with references to any supporting documents you include
  • Your postal address and telephone number

Once you’ve gathered your information and thoughts, here’s how.

1. Be honest about your financial situation

The lender already knows, or at least suspects, a problem with the request. Now is not the time to try to convince them otherwise or to find excuses for them. Politely state the problem as a question of fact, then continue with the explanation.

2. Be brief

The underwriter wants to see all the information they need to understand the problem, but that’s all they want to see. Keep your explanation brief, to the point, and to the point.

3. Provide evidence to support your explanation

If, for example, the lender thinks you will have an excessive commute from your new home, consider getting a letter from your boss or from the human resources department explaining the situation and attach it to your letter.

Likewise, if a prolonged illness has prevented you from working, enclose your unemployment benefit statements and / or medical bills with your letter.

4. Proofread your letter for errors

An error-free letter shows that you have taken the Underwriter’s request seriously. Also, be sure to maintain a professional tone throughout the letter.

Explanation letter template

The content of your letter will of course depend on your particular situation. You can use the following template letter and replace the details in brackets with your own information and explanations:

Dated
[XYZ Bank]
[123 Broadway]
[New York, NY 20021]
[555-555-5555]
[RE: Jane Smith’s mortgage loan application #123456]

Dear loan specialist:

I am writing to you in response to the underwriter’s request for information regarding [my gap in employment] of [January 15, 2020 to June 15, 2020]. The reason for my absence from work was [the premature birth of my son on January 15, 2020].

In support of my explanation, I have attached the following documentation:

  1. [An insurance statement documenting that he was hospitalized from January 15, 2020 through April 1, 2020]
  2. [Certification of Health Care Provider for Family Member’s Serious Health Condition under the Family and Medical Leave Act form]
  3. [A letter from his pediatrician restricting him from attending daycare until June 15, 2020]

If you have any further questions, please do not hesitate to contact me.

Truly,

[Jane Smith]
[123 State St.]
[New York, NY 20012]
[555-555-0001]

What to do if your letter of explanation is rejected

In the event that the underwriter rejects your explanation, you have a few options. First, you can submit a new letter with more specific details. Include anything you might have forgotten the first time around and some additional documentation to support your explanation.

If that is not enough to qualify for the loan, you can start from scratch and try to get a mortgage with another lender, but you might encounter the same problem.

Your best bet might be to postpone your purchase while you improve your credit and / or solve the problems which precipitated the request for explanations. At the very least, the issues will be more distant in the past the next time you apply, so they might have less of an impact on the lender’s decision.

Compare several lenders

If your letter of explanation is rejected, you may want to try turning to another lender. Credible’s streamlined process can help. We make it easy to compare multiple mortgage lenders. In just a few minutes, you can view prequalified rates and generate a streamlined pre-approval letter, all without leaving our platform.

About the Author

Daria uhlig

Daria Uhlig is a Credible associate who covers mortgages and real estate. His work has been published in publications such as The Motley Fool, USA Today, MSN Money, CNBC, and Yahoo! Finance.

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