Why Mortgage Underwriters Ask For Letter of Explanations?

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In this blog, we will cover why mortgage underwriters ask for letter of explanations. Letter of explanations is part of the mortgage process. Anyone who has been through the mortgage process will have experienced multiple requests for letter of explanations during the mortgage process.

Letter of explanations do not have to be lengthy. It just needs to be a sentence or two and to the point. Many borrowers get nervous when asked for letter of explanation by mortgage underwriters.

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 the underwriter during the mortgage process.

When Are Letter of Explanations Required By Mortgage Underwriters

Letter of explanations are required by mortgage underwriters on the following type of incidents during the mortgage process:

• 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

This article will discuss and cover why underwriters ask for letter of explanations.

Should I Worry When Mortgage Underwriters Ask For Letter of Explanations

Many home loan applicants panic when asked for a letter of explanation from the mortgage underwriter throughout the mortgage loan process. There is no right or wrong way to write a letter of explanation. Some letters of explanation are extremely important and can make or break a loan commitment.

Most letter of explanations can be one-liners. Most experienced mortgage loan officers will review the issue the mortgage underwriter is asking.

Most loan officers will write letters of explanation for borrowers. All the borrower needs to do is sign them. Often 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 explanation at closing. The letter of explanation should not be long and should focus on the question or questions.

How To Write Letter of Explanations To Underwriters

One of the most common requests for letter of explanation is the credit inquiries that are reported on your credit report. Let’s take an example of sample credit inquiries on a 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 show on the credit report, and the mortgage loan underwriter is requesting letter of explanations.

Sample Letter of Explanation To a Mortgage Underwriter

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 typewritten, signed, and dated by the borrower and borrowers of the home loan.
• Letters of explanations should not be lengthy and should be as concise 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.

Letter of Explanation 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 for bankruptcy or had to go through a foreclosure. No need to panic. Mortgage underwriters will already have your bankruptcy and foreclosure papers. All they need is, in your own words, the cause of your bankruptcy or foreclosure.

LOX Before Bankruptcy 

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 For Derogatory Items

Most mortgage borrowers freak out when a mortgage underwriter asks for letter of explanations on unpaid collection accounts and prior derogatory items. No worries. Borrowers can qualify for an FHA loan with unpaid collection accounts and prior derogatory items.

Medical collections do not even count and are ignored by mortgage underwriters, but they still want a letter of explanation. Letter of explanations should be very brief and to the point. Gustan Cho Associates has no lender overlays on government and conventional loans.

For 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 overlays. If the current lender instructs to pay off outstanding collections or charge-offs, please contact us at Gustan Cho Associates at 800-900-8569 or text us for faster response. Or email us at gcho@gustancho.com.

LOX on Outstanding Collection Accounts

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.

Letter of Explanations For Late Payments After Bankruptcy and Foreclosure

Late payments after bankruptcy and foreclosure are the kiss of death. Most lenders WILL NOT accept any mortgage applicants with late payments after bankruptcy, foreclosure, short sale, or deed-in-lieu of foreclosure for seven years. Even if they have an approve/eligible per Automated Underwriting System (AUS).

Gustan Cho Associates will accept late payments after bankruptcy and foreclosure if borrowers have automated approval.

Over 80% of our borrowers are going through a stressful mortgage process or had a last-minute mortgage loan denial due to the lender overlays. Borrowers going through a stressful mortgage process or get a last-minute loan denial, please get in touch with us at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays.