Letter Of Explanations

If you are planning on applying for a residential mortgage loan or are currently going through the mortgage approval process, one of the things that you will encounter is when a mortgage loan underwriter will require letter of explanations for one or more items in question.  Letter of explanations to mortgage underwriters are often requested.  Letter of explanations should be carefully though out before it is submitted.  Your mortgage loan originator will most likely review the letter of explanations prior to submitting it to the mortgage loan underwriter that is underwriting your mortgage file.

Cases Where Letter Of Explanations Is Required

One of the most common cases where letter of explanations is required is when you have multiple credit inquiries on your credit report.  When a mortgage loan underwriter reviews your credit report and sees multiple credit inquiries, letter of explanations will be required.  The letter of explanations for credit inquiries is always required.  The letter of explanations for credit inquiries does not have to be detailed.  For example, if you have multiple credit inquiries from multiple mortgage lenders, all you need to write on your letter of explanations for the multiple mortgage lender inquiries is just “Shopping for mortgage”.   It is the same case if you had multiple credit inquiries from auto finance companies.  All you need to state on the letter of explanations is “Shopping for cars”.  Mortgage lenders do not like seeing multiple credit inquiries.

Letter Of Explanation For Multiple Credit Inquiries

If someone is applying for multiple credit cards, this might show that the applicant is desperate for money and that is the reason why they are applying for multiple credit cards at once.  If this is the case with you where you have multiple credit card inquiries is just write “Shopping for credit cards for the best available rates”.  This letter of explanations will be sufficient.  There are also other letter of explanations where it needs to be more detailed.  If you are a seeking a home loan with bad credit, your prior bad credit issues may need letters of explanations.

Letter Of Explanations For Periods Of Bad Credit

For example, if you had a history of good credit and payment history but all of a sudden you could not make payments on your monthly credit obligations and your credit scores suffered due to the loss of your job, you need to write a detailed letter of explanations as of why you could not pay your bills and the circumstances surrounding it.  On this particular case, you would need to explain to them about your job loss.  When you write letter of explanations, make sure you provide supporting documents.  If you lost your job for a period of time, along with your letter of explanations, provide proof such as W-2s, tax returns, and paycheck stubs prior to your loss of job and after.  Everything in your letter of explanations should be documented.  There are cases where mortgage loan underwriters will require multiple letters of explanations.  Letter of explanations might be required if you had gaps in employment or if you been unemployed for a period of time.

Letter Of Explanations For Back To Work Mortgage Program

HUD launched the FHA Back to Work Extenuating Circumstances due to an economic event mortgage loan program last August 15, 2013 which shortens the waiting period to one year after bankruptcy, foreclosure, deed in lieu of foreclosure, and/or short.  Typical traditional waiting periods are longer than the one year waiting period of the FHA Back to Work Extenuating Circumstances due to an economic event mortgage loan program.  For a home buyer who has had a prior bankruptcy, the waiting period is two years from the discharge date of the bankruptcy for a home buyer to be able to qualify for a residential mortgage loan.

Home Loan After Bankruptcy And Foreclosure

There is a mandatory three year waiting period after the recorded date of a foreclosure or deed in lieu of foreclosure to be able to qualify for a residential mortgage loan.  For those who had a prior short sale, there is a three year waiting period after the date of the short sale which is reflected on the HUD’s settlement statement of the short sale.  One of the most important factors in determining whether or not you qualify for HUD’s FHA Back to Work Extenuating Circumstances due to an economic event mortgage loan program is the letter of explanations surround your unemployment or underemployment that has led to the bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale.

Qualifying For FHA Back To Work Mortgage Program

To qualify for HUD’s FHA Back to Work Extenuating Circumstances due to an economic event mortgage loan program, you need to have been unemployed or underemployed and have had a 20% reduction in household income which resulted in the initiation of the bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale.  The letter of explanations is the most important factor in HUD’s FHA Back to Work Extenuating Circumstances due to an economic event mortgage application.  The letter of explanations should be detailed and specific.  Documents like tax returns, W-2s, and paycheck stubs before and after the economic event should be provided with your letter of explanations.  Your letter of explanations will be the deciding factor whether or not your FHA Back to Work Extenuating Circumstances due to an economic event mortgage application will move forward or not.

How LOX Should Be Structured For FHA BACK TO WORK EXTENUATING CIRCUMSTANCES MORTGAGE LOAN APPLICATIONS

FHA Back to Work Extenuating Circumstances due to an economic event mortgage loan underwriters want to see letters of explanations from mortgage borrowers in this structure:

The Back to Work Extenuating Circumstances due to an economic event mortgage loan applicant needs to structure their letter of explanations in a format covering the Back to Work Mortgage Loan Program mortgage lending guidelines.  This is what FHA Back to Work Mortgage Underwriters want to read.

The mortgage loan borrower had a good credit history prior to the loss of his or her job.  The job loss cannot be a voluntary leave but needs to be a forced termination or layoff.  Once the layoff took place, the credit scores had a significant drop due to the mortgage loan borrower not being able to pay their bills due to lack of income or the 20% reduction of their household income and the combination of bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale.  After the bankruptcy, deed in lieu of foreclosure, foreclosure, or short sale, the mortgage loan borrower needs to be employed and have no late payments and re-established credit.  The mortgage loan borrower’s credit scores should see a gradual increases month after month after the bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale.  The mortgage loan borrower needs to prove that he or she is back on their feet with re-established credit.

The above outline is what needs to be explained on the letter of explanations for the FHA Back to Work Extenuating Circumstances due to an economic event mortgage application.  On your letter of explanations, please specify the circumstances on how much you were making prior to your loss of job, how long you were unemployed or underemployed, explain how much in unemployment benefits you were receiving, explain what you did during the period of economic distress ( whether you contacted your creditors or family members for a short term loan), and the events leading to your bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale and how you have recovered and are now in good stable financial grounds.  Again, letters of explanations is what will make or not make your Back to Work Extenuating Circumstances due to an economic event mortgage application to proceed forward.  Everything you stated on your letter of explanations should have as much documents as possible supporting your letter.

By Gustan Cho

www.gustancho.com

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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