Are you one of those people that cringes when someone asks you to write something? Fortunately, when your loan officer or an underwriter requests a letter of explanation, it doesn’t have to be a big stress moment.
It’s common for mortgage underwriters to ask for a written explanation for certain situations or problem areas in your credit history, employment or other areas.
Basically, they want an explanation and possibly documentation of a certain happening in your background and your credit history.
“The three most common questions they have are regarding credit, employment or previous addresses,” says Tim Halladay, owner of Victory Funding and broker/owner of Living Well Realty, both in Malta, N.Y. “This can be very overwhelming to a consumer. People don’t write letters personally, so they have no idea what all this entails.”
But Halladay writes all his borrowers’ letters.
“I dig as deep as I can to get their reasons. I know the format, and I know what the underwriters need to hear. But it all has to be accurate, and they have to sign it or correct it,” he says.
But for those who don’t have a broker or other loan specialist to help them through this, here are some tips on how to handle these requests, why they are needed and the things to include and not include in a letter of explanation (also called LOX or LOE):
Reasons they ask for a letter of explanation
Underwriters have certain guidelines and rules they go by, especially while using mortgage software to go through all the numbers associated with your mortgage application.
But if something comes up that is outside of those guidelines, they want to know why. This can be anything as simple as a late payment two months ago on your car payment.
You also will be asked for a letter if you have a joint bank account with a spouse or significant other, late payments on rent or house payment, a bankruptcy, a big deposit in your savings recently, or any number of other things that don’t add up to them.
Former addresses can be a concern
Halladay says that underwriters often ask for an explanation about previous or current addresses on your credit report. For instance, your name might be associated with your parent’s home because they put your name on the deed for estate planning.
Sometimes, you might not have even known you’re associated with a different address than your current one.
Halladay had a recent client who needed to write a letter explaining that the client is the trustee for his parents’ estate, but not an owner. However, their home was listed on the credit report.
The client had to write a letter explaining that at some time in his life, he did live there, but has no obligation on the property now.
Derogatory credit takes special formula
When a red flag shows up on your credit report saying you had delinquent payments, underwriters want to know why it happened, why it wasn’t your fault and why it will never happen again.
“I help borrowers who have been declined because they didn’t do this step correctly when writing their letter,” he says. “You have to include all those elements.”
For instance, if you had a baby and there were complications that kept you in the hospital for an extended time, the underwriters want to see the documentation that explains that it was the reason you were two months late on your rent.
“The underwriters have a heart. They are people. If it’s something tragic, put that in the letter,” he says. “My point in those letters is to make the underwriter cry.”
The type of documentations needed with the letter
If you were in the hospital and couldn’t work for six weeks, a copy of the hospital bill is a perfect documentation to send with your letter of explanation. If there was a death in the family that took you away from work, then a letter of explanation should say that along with a possible copy of the obituary.
If you put $5,000 in your savings account two months ago because an aunt left you some inheritance, then send a copy of the check from the lawyer and any type of letter or will that can verify it all.
Simpler the better
When writing your letter of explanation, the magic formula is to just write a simple explanation, Halladay adds. For instance, tell the underwriter that a snow plow hit your mailbox, and you didn’t get the bill that showed up delinquent on your credit report. That’s all you have to explain.
Something the underwriter can’t ask for
Because of privacy laws, underwriters can’t ask for a letter from a doctor. If you are getting disability, the underwriters have to assume it is permanent. They can’t ask if you are getting it temporarily.
The way to write the letter
No one is expecting a long letter, so a few sentences will suffice. Also, do not give any more information than what is requested, Halladay states.
There are no wrong or right answers for your letter – it’s just your explanation for what happened. Don’t make anything up and provide a clarification about the facts.
Put the letter in business style including your name, date written and contact information. Follow the instructions given to you on to whom to address the letter to, and always remember to include how the situation was resolved and when.