Letter Of Explanations
If you are currently in the mortgage loan application process or about to start the mortgage loan application process with a mortgage company, be prepared to write letter of explanations for derogatory past credit, prior bankruptcy, prior foreclosure, prior deed in lieu of foreclosure, short sale, late payments, irregular deposits, large deposits, gaps in employment, credit inquiries, and other issues that the underwriter needs clarification. Many home loan applicants panic when they are asked for letter of explanations from the mortgage underwriter throughout the mortgage loan process. There is no right or wrong way in writing letter of explanations. Some letter of explanations are extremely important and can make or break a loan commitment, but the majority of letter of explanations can just be one liners. Most experienced mortgage loan officers will go over the issue the mortgage underwriter is asking and will write the letter of explanations for you and all you need to do is sign it and date it. Many times the loan officer will interview you and you tell the loan officer what happened and he or she will type it up for you and you can sign the actual letter of explanations at closing. Letter of explanations should not be long and should just be focused on the question or questions asked.
How To Write Letter Of Explanations To Underwriters
One of the most common requests for letter of explanations is the credit inquiries that are reported on your credit report. Let’s take an example of sample credit inquiries on your credit report:
1. ABC Mortgage
2. First Financial
3. Best Home Loans
4. Capital One Credit Card
5. Used Autos
6. ABC Auto Finance
Let’s assume the six credit inquiries above shows on your credit report and the mortgage loan underwriter is requesting letter of explanations. Here is what needs to be written to satisfy these conditions all in a one page letter:
To whom it may concern:
I am writing to explain the credit inquiries on my credit report. Item 1, ABC Mortgage, was a credit inquiry due to shopping for mortgage. Item 2, First Financial was a credit inquiry due for shopping for mortgage. Item 3, Best Home Loans was a credit inquiry due for shopping for mortgage. Item 4, Capital One was an inquiry due to shopping for best credit card interest rates. Item 5, Used Autos was for shopping for a car. Item 6, ABC Auto Finance was an inquiry for shopping for auto loan interest rates.
The above letter of explanation is more than sufficient. Letter of explanations should be type written, signed, and dated by the borrower and/or borrowers of the home loan. Letters of explanations should not be lengthy and should be as consise and short as possible. You do not want to volunteer more information than whatever is requested because volunteering more information may open up a can of worms.
Letter Of Explanations For Prior Bankruptcy Or Foreclosure
Many mortgage loan applicants who had a prior bankruptcy or foreclosure panic when the mortgage underwriter asks for letter of explanations on why they filed bankruptcy or had to go through a foreclosure. No need to panic. Mortgage underwriters will already have your bankruptcy and/or foreclosure papers. All they need is from your own words the cause of your bankruptcy or foreclosure. Here is a sample letter of explanation for a prior bankruptcy:
To whom it may concern:
I filed for bankruptcy on January of 2010 and my bankruptcy was discharged in April of 2010. The reason for me filing for Chapter 7 Bankruptcy was due to being unemployed since June of 2009 from my employer, ABC Consulting. I tried gaining employment but after six months of being unemployed, I had no choice but to file bankruptcy.
The above letter of explanation is more than sufficient and you do not have to get more detailed than that. Most letters of explanations is just a formality required by mortgage lenders. Chances are that your mortgage loan officer will write the letter of explanation for you or coach you on how to write your letter of explanations.
Letter Of Explanations For Derogatory Items And Unpaid Collection Accounts
Most mortgage borrowers freak out when a mortgage underwriter asks for letter of explanations on unpaid collection accounts and prior derogatory items. No worries. You can qualify for a FHA loan with unpaid collection accounts and prior derogatory items. Actually, medical collections do not even count and are ignored by mortgage underwriters but still want a letter of explanation. Letter of explanations should be very brief and to the point. For example, if the underwriter asks for letter of explanations on unpaid collection accounts, all you need to state is the following:
To whom it may concern:
I am writing this letter of explanation to address ABC Credit Card collection account. Back in 2009, I lost my job and was unemployed for over six months. Due to my unemployment, I could not pay my bills and ABC Credit Card went into collections. I have since recovered and have re-established credit and have been timely on all of my payments.
The above is all you need to state on derogatory credit items.