Understanding Letters of Explanation

May 11, 2017 12:00 am

Woman holding black pen getting ready to write something on a piece of paperWhen a borrower applies for a home loan, almost every aspect of their financial life is examined. Sometimes, a borrower may have something show up on the credit report, personal documents provided, or loan application that needs further clarification. When this happens, the underwriter may request something called a “letter of explanation” where they would ask for more information to clarify the situation. A typical reason for a letter of explanation is for recent credit inquiries on your credit report.

The letter of explanation is your opportunity to share your story with the underwriter. They want to understand what is happening on your loan. Don’t be afraid when these items are requested.

Underwriters are essentially the “gatekeepers” of loan approval and will compare the loan guidelines to the borrower’s documents to determine if they are approved for a home loan. Going back to our example, if they see recent inquiries on your credit report, they should ask for clarification; that is, are there new obligations, such as a new car payment, that need to be considered in the loan approval. A letter of explanation will help the underwriter bridge the gap and verify that everything is in order. Letters of explanation are also commonly requested if the underwriter notices inconsistent income or large, unspecified deposits or withdrawals from the borrower’s bank account.

It is important to remember that letters of explanation help mortgage lenders understand obscure situations for qualified applicants and assist our team at Fairway with understanding your financial background. When you are ready to purchase a home, I would love to discuss you home loan options with you.