Understanding the Importance of a Letter of Explanation for Mortgage Approval

What is a Letter of Explanation for Mortgage?

A letter of explanation for mortgage, also known as a letter of explanation, is a document that borrowers are often required to submit to their mortgage lender. This letter is meant to provide clarity on any discrepancies or unusual issues found on the borrower’s credit report or loan application. It serves as an opportunity for the borrower to explain the circumstances behind certain financial activities, such as late payments, derogatory marks, or changes in employment.

In this article, we will delve into the purpose of a letter of explanation for mortgage, the situations where it is typically required, and the key elements that should be included in the letter.

Purpose of a Letter of Explanation for Mortgage

The primary purpose of a letter of explanation for mortgage is to mitigate potential red flags that may arise during the loan approval process. Lenders often use this letter to verify the borrower’s claims and ensure that their financial situation is stable and credible. By providing a clear and concise explanation, borrowers can help lenders make more informed decisions regarding their loan applications.

Here are some common reasons why a letter of explanation for mortgage may be required:

1. Late payments: If the borrower has a history of late payments on their credit report, they may need to explain the reasons behind these occurrences.
2. Derogatory marks: Borrowers with derogatory marks, such as charge-offs or collections, may need to provide an explanation for these issues.
3. Changes in employment: If the borrower has recently changed jobs or experienced a gap in employment, they may need to explain the circumstances.
4. Large deposits: Lenders may require an explanation for any large deposits made into the borrower’s bank account, as they may be concerned about the source of the funds.
5. Unusual expenses: If the borrower has incurred significant expenses, such as medical bills or car repairs, they may need to provide an explanation for these costs.

Key Elements of a Letter of Explanation for Mortgage

When writing a letter of explanation for mortgage, it is essential to include the following key elements:

1. Borrower’s contact information: Include your name, address, phone number, and email address.
2. Lender’s contact information: Include the name and contact information of the mortgage lender or loan officer.
3. Date: Write the date on which the letter is being submitted.
4. Purpose of the letter: Clearly state the reason for writing the letter, such as explaining late payments, derogatory marks, or changes in employment.
5. Detailed explanation: Provide a thorough and honest explanation of the circumstances surrounding the issue. Be concise but specific, and avoid making excuses or apologies.
6. Supporting documentation: Attach any relevant documents that can support your explanation, such as pay stubs, medical bills, or letters from employers.
7. Closing statement: Conclude the letter by expressing your gratitude for the lender’s consideration and emphasizing your commitment to maintaining a strong financial standing.

Conclusion

A letter of explanation for mortgage is a crucial document that can significantly impact the outcome of a loan application. By addressing any potential red flags and providing a clear and concise explanation, borrowers can help lenders make more informed decisions. Remember to include all the necessary elements and maintain a professional tone throughout the letter. With a well-crafted letter of explanation, borrowers can increase their chances of securing a mortgage loan.