When a lender asks for a letter of explanation, there’s no need to panic — more than likely the lender just needs your help to clear up, in writing, something about your credit, earnings or assets. Knowing how to write a letter of explanation (or LOE for short) may even help you avoid a loan denial or a delayed loan closing. Show
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What’s a letter of explanation?A letter of explanation is a written, signed and dated document you prepare to address questions a mortgage lender may have about your loan application. A loan processor or underwriter may request a letter of explanation to strengthen the case for approving your loan application and to provide evidence that your financial profile meets their minimum mortgage requirements. How a letter of explanation can improve your mortgage approval chancesFederal regulations require that lenders prove they have verified your ability to repay the loans they make. A letter of explanation may provide the extra documentation needed to:
Why do I need to write a letter of explanation?You’ll need a letter of explanation if an underwriter doesn’t understand information on your mortgage application, or needs additional details to make a final decision about approving your loan. Here are common reasons lenders ask for LOEs. Credit history issuesLate payments, collections and major derogatory credit problems like foreclosures or bankruptcies almost always require a letter of explanation. Underwriters look at how you’ve managed credit in the past to determine if you’ll be able to afford a new loan. Employment history or gaps in employmentMost loan programs require a two-year employment history without gaps between jobs. A large gap may be a red flag to a lender that your income could be unstable, when in reality you may have taken time off due to a personal illness or that of a close relative. If you’ve changed careers, a lender may ask you to explain if you’ve received any training or experience before the switch to make sure your earnings prospects are steady. Remote work confirmationLenders may ask for proof your employer allows you to work remotely if you’re moving to a different city or state from where your company is headquartered. Your employer should use the same format detailed below if the lender requests an LOE directly from them. Address historyIf there’s a difference between the addresses on your driver’s license, loan application and credit report, the lender will ask for a letter to clear up the discrepancies. Income fluctuationsUnderwriters scrutinize how stable your income is, and big increases or decreases in your income could result in a letter of explanation request. If you’re self-employed with complicated tax returns, you might even need to request a letter from your tax professional to help the lender understand how you’re paid. Losses on your tax returnsReal estate investors, self-employed borrowers and independent contractors may show losses in the first couple of years of business. Because of this, the lender may require explanations to confirm the losses aren’t likely to continue. Large deposits or withdrawals from your bank accountsTransferring large sums of money (more than 50% of your normal monthly income) between bank accounts, or depositing gift money from a relative for a down payment, could require an LOE. Lenders may also ask for additional documentation to confirm where the deposited money came from. If you pay child support or alimony, the lender may request copies of your divorce paperwork if the withdrawals come out of your bank statements but don’t appear on your credit report. Credit inquiriesA credit inquiry tells a lender you may have opened a new credit account, which could affect the mortgage amount you qualify for. You’ll also need proof of the new account balance and monthly payment if you open new credit that doesn’t yet appear on your credit report. Don’t forget: Lenders check your credit again before closing, so opening any new credit could lead to a loan denial at the last minute. Cosigned loans or real estateA cosigned student loan, car loan or mortgage will require an explanation and possibly proof that you don’t make the payments. Relationship explanationIf you have the name of a child or parent on your bank statements, lenders may ask you to explain who they are, and even ask them to provide a letter confirming you have access to all the funds in the account. You’ll need a gift letter that explains how you’re related to anyone giving you money toward your down payment, closing costs or mortgage reserves. How to write a letter of explanationUse the following checklist as your explanation letter format:
5 tips for a good letter of explanationThere are a few guidelines that apply to writing a consumer explanation letter, regardless of the situation.
Letter of explanation templateUse the explanation letter sample below as a guide for your LOE: https://www.lendingtree.com/content/uploads/2020/02/Mortgage-letter-of-explanation-template.pdf Frequently asked questionsWhat if my letter of explanation is rejected?A rejected letter of explanation could mean it’s time to start over with a new lender or switch to a more flexible loan program (such as an FHA loan). In other cases, you may just need to provide additional explanation. Is it bad if a lender asks for a letter of explanation?Not necessarily. Some explanations are always required — such as inquiry letter requests or address discrepancies. In other cases, the underwriter just needs additional assurance that you can afford the loan before they approve it. Do I need to include documents with my letter of explanation?In some cases, you may need to add financial documents to support your letter. For example, if you had a bankruptcy, you may need bankruptcy paperwork along with your LOE. What is a letter of explanation for cashWhat is a cash-out refinance letter of explanation? A letter of explanation for a cash-out refinance does what its name implies. It explains to the lender why you want to take some cash out while you're refinancing. There are many other types of letters of explanation that lenders might request.
What are acceptable reasons for cashThe following are acceptable uses for cash-out refinance transactions: paying off the unpaid principal balance of the existing first mortgage; financing the payment of closing costs, points, and prepaid items. The borrower can include real estate taxes in the new loan amount.
How do I write a letter of explanation for a mortgage lender?How to write a letter of explanation. The lender's name and address.. Your name and your application number.. The date you're submitting the letter and expected closing date (if you know it). A short statement that helps an underwriter fully understand your situation in regards to the reason for concern.. How do I write a letter of intent to refinance?To write an intent to occupy letter, you should include your name, the home's address, your decision to apply for a mortgage and your intent to occupy the home as the owner. You should also include any specific details that your lender requests.
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