At times, you may need to attach a Letter of Explanation (LOE) to your application. This may occur if there is a negative history in the credit report, like a missing document that could not be provided, or if more details are needed concerning your mortgage application. This shouldn’t be a cause for panic as it allows you to clarify complications, including glitches in your credit history or employment, to help you qualify for a home loan.
Writing letters of explanation can be a pain, but they aid in getting loans. In this article, we’ll explain what a letter of explanation” mortgage is and the situation in which the need to write one might arise. You will also find a sample letter of explanation and a template to guide you. Now, here’s what you should know.
Overview
Written communications are a clear and simple method for resolving conflicts and helping to reach an agreement. Therefore, explaining situations is important to maintain effective communication. Standard mortgage forms most of the time do not provide space to explain any obstacles in your application. This letter enables you to explain and clarify any complications or obstacles in your history of employment to enable you to qualify for a home loan.
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A “letter of explanation” is a document requested by mortgage lenders when more details about your financial situation are needed. It helps mortgage lenders to understand more about your financial ability before determining whether to approve or refuse your loan request.
A letter of explanation gives the borrower the chance to answer questions the lender might have as regards the loan application. It also gives underwriters all the information they need to analyze a loan application. An underwriter has the right to request it if they run into questions about your finances during the mortgage approval process. An underwriter is a party involved in the money lending process whose role is to evaluate and assume the risk of payment for another party. They work in many areas of finance, such as insurance companies, industries, mortgage lending companies, and banks. They determine the risk level for lenders.
For instance, when you apply for a loan, your lender studies and observes your credit history. Precisely, they check for detracting remarks on your credit report, such as late payments, charge-offs, bankruptcies, foreclosures, delinquencies, and judgments.
Most of the time, it is a good sign when an underwriter requests a letter of explanation. This is because you’ve not been outrightly rejected. It could mean they are satisfied with everything on your loan application except for a particular point that they need you to clarify, thereby allowing you to add other details that could lead to approval.
Reasons For a Letter of Explanation
Generally, a lender or underwriter may request a letter of explanation once they suspect any information given about your credit history or financial situation. A lender could also request a letter of explanation to make them feel confident and sure that you’ll be able to make your monthly mortgage repayment. Here are some of the reasons you may need to present a letter of explanation:
- Late payments, collection accounts, judgments, or bankruptcies on your credit history.
- The difference between the name and address on your credit report and the name provided on your mortgage application.
- Variation in the employment history given to the mortgage lender and what is listed on your credit reports.
- Discovery of an active fraud alert on your credit reports.
Other reasons or red flags unrelated to a credit report that could prompt a lender to request a letter of explanation include:
- Issues with bank accounts, such as overdrafts, unusually large deposits or withdrawals, or large transfers between accounts.
- Holding a joint account with someone else while filing for a mortgage loan only in your name.
- Unsteady source of income. This could happen if the borrower is self-employed or an independent contractor.
Therefore, one should be prepared to write a letter of explanation to explain the reasons behind inconsistencies in work history or unstable swings in income if your tax returns show some significant ups and downs.
Steps Involved In Writing a Letter Of Explanation
There are different approaches to writing a letter of explanation. The approach to use depends on the situation or context in which you’re writing the letter. Keep in mind that the letter should contain all the details of transactions with correct dates and prices, an explanation of what it took you to resolve the issue, and most importantly, it should outline why the problem won’t arise again and how you intend to avoid this mistake in the nearest future.
Below are the general steps you could use in writing a letter of explanation. You can adapt this to suit the context you’re writing for.
Choose the Format
A letter of explanation written to a mortgage lender is usually a formal letter that should be printed to give it a more formal look.
Explain the Situation
The body of the letter should contain a detailed explanation of the situation, when and how it occurred, the circumstances, and any contributing factors. While explaining this, it is important to reference your role in the situation, what preventative steps might have helped, and most of all, be sure to stay concise. Be honest. Never write a letter solely about what you think your lender wants to hear. Don’t make the mistake of changing the dates, amounts, and any other important detail.
Take Responsibility and Accountability
This involves taking responsibility for any choice or mistake you must have made that fueled the misunderstanding. It is important to include how you intend to handle the situation in the future to prevent its reoccurrence. This is important as it increases your chances of approval.
How To Write a Letter Of Explanation
Your letter of explanation should include the following details. You can also follow the guide in our sample template below.
- The date
- The name of the lender
- The mailing address and phone number of the lender
- Your name, application number, and other information.
- The information requested by the lender in one or more paragraphs
- Additional documents to back up your explanation
- Your full legal name in the order in which it appears on your mortgage application {is signed and printed}.
- The full name of your spouse or partner and indicate if they are on the loan application with you.
- Your complete mailing address and phone number.
- Your complimentary closing
Letter Of Explanation Template
A letter of explanation is a legal document that your mortgage lender will be adding to your loan file. Therefore, you should check properly for grammatical errors, spelling mistakes, and punctuation. A visually appealing and well-edited letter that communicates the needed information should be presented.
It is best to reset your letter in typed form. A handwritten letter is also acceptable but could be difficult to read if your handwriting is illegible and this could only lead to more complications. Presenting your letter with additional information can also increase your chances of approval.
Below is a sample template of a letter of explanation which can serve as a guide when writing yours.
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(Your name)
Current address
City, state, zip code
Date
Re: Mortgage application number
Dear Mr. or Ms. (Add the name of the person you will be addressing the later to)
I write this letter as an explanation letter to my current financial situation that has brought about a delay in the payment of my mortgage loan due on the last day of the previous month. This is due to a financial crisis that I am currently facing because of an accident I was involved in. I’ve been bedridden and unable to work. I deeply apologize for not meeting up to my end of the contract.
You are aware that I have always met my loan requirements regularly without delay. my health is finally picking up and I’d be on my feet again in no time. I hope to resume work in order to clear up my mortgage debts.
I’d love a temporary agreement within the next three months to enable me to pay minimum payments. I sincerely hope that this situation does not repeat itself. kindly consider my situation and pardon me for the delay in payment.
Attached to this letter are my medical records on my current health condition as evidence. I sincerely hope for your consideration.
Kind regards,
Brown Richard.
The Bottom Line
A mortgage letter of explanation is an important tool that determines if your mortgage application will get approval or not. It is important to write clearly and briefly. Also, ensure that it is submitted in due time as nothing would be done about your loan if the letter isn’t presented.
To get started, use the downloadable mortgage letter of explanation template. Having a friend or family member proofread it, is a good idea as it could help you avoid grammatical or typographical errors. If for some reason, your letter of explanation is rejected by your underwriter. You might want to find out the reason behind it as it could help you while drafting another letter. One of the reasons why your letter could be rejected is if it doesn’t contain the main reason why it was requested.
Your underwriter may accept a new letter depending on the rules and requirements guiding the company. Instead of taking the pains to write another letter of explanation, an alternative after a rejection is to reapply with a different lender. Most of all, you should have a legal adviser to guide you through all the processes involved.
Acceptance of a mortgage letter of explanation doesn’t mean your loan has been approved. You need to prepare for the final stage which is closing. I hope this write up as well as the letter of explanation template sample will guide you on your quest. Good luck!
FAQs
How do you write an explanation letter?
To begin writing this type of letter, discuss the problem or circumstance, as well as any relevant circumstances.
Consider answers to queries like:
- What occurred?
- What caused that to happen?
- Were there any elements that contributed?
- What is the current state of affairs?
Does letter of explanation need to be signed?
Only your signature should be scanned and posted on the last page of your LOE. There is, however, no obligation that the LOE be signed. Note that when you submit your application, you will sign it electronically, essentially confirming that all of your documents and information are correct.
Why do underwriters ask for letters of explanation?
The lender and underwriter may request information from the borrower. A work change, a hiatus in employment, a substantial payment into their bank account, a source of self-employed income, or just about anything else could be the catalyst.
