Letter of explanation in mortgage process
Income, assets, debts, credit, and liabilities are all important factors in the mortgage approval process. If there is anything out of the ordinary such as gaps in employement, a bankruptcy, foreclosure, late payments, collections, derogatory information, and other negative information or questionable information on your credit profile, you will be required to write letter of explanation on each of the questionable items.
Letter of explanation on lates after bankruptcy and/or foreclosure
Most mortgage lenders do not want to see late payments or collections after a borrower has filed bankrutcy or a foreclosure. There are mortgage lenders who will consider approving a mortgage loan to borrowers who have had late payments or collection after a bankruptcy or foreclosure but they will require a detailed letter of explanation on the circumstances on why they were late. Letter of explanation stating , “Oh, I forgot or Oh, I thought my husband or wife was suppose to pay” will not fly. Certain letter of explanation like having a job loss or medical issues will carry a lot of weight but needs to be extremely detailed and if you can, provide proof along your letter of explanation. If you had prior bad credit and still have charge offs, collections, and late payments on your credit report, every single line item on your credit report needs a letter of explanation on the reason why you were late. Again, you need to explain it in detail and see if you can pinpoint a reason why you were late such as a job loss, divorce, identity theft, or medical issues. Provide any proof that you might have so it adds creditbility and weight. Mortgage underwriters are looking for financially responsible borrowers and will deny mortgage loans for those borrowers that has a history of late payments with no valid reason. Most often than not, this is used as an indicator on the predictability whether the mortgage loan borrower will make timely mortgage payments in the future.
Letter of explanation for prior bankruptcy or foreclosure
If you have a prior bankruptcy or foreclosure, you will be required to write a letter of explanation on why you had to file bankruptcy or had a foreclosure. Again, it needs to be extremely detailed and provide proof why you had to file for bankruptcy or had a foreclosure. Reasons like ” My house was under water so I decided to foreclose on my home so I can purchase a home for much less value three years later” will be a definite mortgage loan denial and is considered a bail. A good reason can be like you had a loss of a job or you had a teaser rate and the loan converted to a high rate such as doubling your monthly payment. Medical emergencies is always a great excuse if that is your case. Major reduction in wages can also be used as a good excuse for your letter of explanation.
Letter of explanation for overdrafts in the prior twelve months
Many mortgage lenders will not approve a mortgage loan if you had an overdraft in the prior 12 months. If this is the case, I suggest you submit bank statement print outs for the past twelve months since most bank statement printouts do not reflect year to date overdraft charges. If you had a bank overdraft in the past 60 days, you will be required to write a letter of explanation and must be detailed. Your loan officer will help you write a letter of explanation if you had overdrafts in the past 60 days.