Why Do Underwriters Ask For Letter Of Explanations

This BLOG On Why Do Underwriters Ask For Letter Of Explanations Was UPDATED On August 14, 2017

Mortgage Borrowers currently in the mortgage loan application process or about to start the mortgage loan application process with a mortgage company should be prepared to write letter of explanations to underwriter during the mortgage process.

Letters of Explanation will be required for the following items:

  • Derogatory past credit
  • Bankruptcy
  • Foreclosure
  • Deed in lieu of foreclosure
  • Short sale
  • Late payments
  • Irregular deposits
  • Large deposits
  • Gaps in employment
  • Credit inquiries
  • Other issues that the underwriter needs clarification. 

Why Do Underwriters Ask For Letter Of Explanations? Should I Worry?

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.
  • Most letter of explanations can just be one liners. 
  • Most experienced mortgage loan officers will go over the issue the mortgage underwriter is asking.
  • Most loan officers will write the letter of explanations for borrowers and all the borrower needs to do is sign it.
  • Many times the loan officer will interview borrowers and the borrowers will tell the loan officer what happened.
  • The loan officer will write it up.
  • Borrowers 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 credit report:

Credit Inquiries                                               

  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 the 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 concise and short as possible. 
  • Borrowers do not want to volunteer more information than whatever is requested because volunteering more information may open up a can of worms.

Why Do Underwriters Ask For Letter Of Explanations 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.

Sincerely,

John Borrower

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 the mortgage loan officer will write the letter of explanation for borrowers or coach borrowers on how to write the letter of explanations.

Why Do Underwriters Ask For 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.

  • Mortgage Borrowers 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. 
  • The Gustan Cho Team at USA Mortgage has no lender overlays on government and conventional loans.
  • Borrowers who are currently in the mortgage process with a lender and that lender is asking for collections and charge offs to be paid off, it is because that lender has lender overlays.
  • If current lender instructs to pay off outstanding collections or charge offs, please contact us at The Gustan Cho Team at 1-800-900-8569 or email us at gcho@gustancho.com.

For example, if the underwriter asks for letter of explanations on unpaid collection accounts, all that needs to be stated 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.

Sincerely,

John Homebuyer

The above is all you need to state on derogatory credit items.

Why Do Underwriters Ask For Letter Of Explanations With Late Payments After Bankruptcy And Foreclosure

Late Payments after bankruptcy and/or foreclosure is the kiss of death. Most lenders WILL NOT accept any mortgage applicants with late payments after bankruptcy, foreclosure, short sale, deed in lieu of foreclosure for 7 years. Even if they have an approve/eligible per Automated Underwriting System (AUS). However, The Gustan Cho Team at USA Mortgage will accept late payments after bankruptcy and/or foreclosure as long as borrowers have an automated approval. Over 75% of our borrowers are folks who are going through a stressful mortgage process or had a last minute mortgage loan denial due to the lender overlays. Borrowers who are going through a stressful mortgage process or gotten a last minute loan denial, please contact us at 1-800-900-8569 or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays.

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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