What is a Letter of Explanation?

What is a Letter of Explanation?
David Andrew
By: David Andrew
Posted: December 6, 2013
Experts share their tips and advice daily on BadCredit.org, helping subprime consumers navigate the world of personal finance.

When you apply for a mortgage loan, the lender is going to closely examine your credit history and financial information.

During this process, the lending department might see something they need to learn more about to make a decision.

In this case, you will be asked for a letter of explanation to answer the lender’s questions and complete your application.

When might you need to provide a letter of explanation?

Lenders request a letter of explanation when they see something in your financial records that could be a red flag about your ability to repay the loan.

For example, if you missed some payments on an old credit account, they may ask you to explain what happened and why this will not happen on your mortgage loan.

Lenders may also request a letter if they see something that looks off about your income.

Let’s say you needed surgery last year and had to take several months off work. A lender might see your income fell and ask what happened.

Sometimes lenders ask for a letter of recommendation as part of a mortgage refinance that cashes out your home equity.

They would ask what you plan on doing with the money because they want to see whether you will still be able to pay off the larger mortgage loan after the refinance.

“Provide evidence of what

happened along with your explanation.”

How to write a good letter of explanation:

Your letter of explanation should just clearly and simply answer the questions from your lender.

If you missed work because of a long hospital stay, it would be a good idea to attach any bills or records from the hospital.

If you are worried about whether your letter is complete, you could ask the loan officer from the bank whether you have done enough or need to add more to your letter.

What happens after you send your letter?

The loan officer will take your letter of explanation and continue reviewing your application. If your explanation and the rest of your application looks good, you will qualify for a loan.

If your letter does not explain the issue or your application was not strong enough, you might not qualify for a mortgage

If a lender ever asks you for a letter of explanation, do not get scared or discouraged. Simply answer the necessary questions and your application will continue moving along.

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