Letter of Explanation for Mortgage: When and How to Provide It
This article provides an overview of when and how to provide a letter of explanation when applying for a mortgage. Learn more about lenders requirements and how to provide an acceptable letter.
Understanding What a Letter of Explanation for a Mortgage Is
When a lender is reviewing a loan application, they often require borrowers to provide a letter of explanation. This letter explains any gaps in employment, non-traditional sources of income, late payments, or other irregularities on the loan application. The letter helps the lender decide if granting the loan is a good financial decision. A letter of explanation is often requested with your mortgage application if something appears to be amiss. It is important to provide one as a supplement to your application, and it should be done in a timely manner.
When to Provide a Letter of Explanation
A lender may request a letter of explanation when an applicant has large deposits to their account that cannot be explained. This can include large transfers from savings accounts or retirement accounts, cashing out stock, or receiving inheritances. The lender will want to know the source and purpose of the deposit. Other situations that may require a letter of explanation include gaps in employment, past foreclosures or bankruptcies, and issues related to previous loans. In general, any issue that could affect the borrower's creditworthiness will require a letter of explanation.
How to Write a Letter of Explanation
When writing a letter of explanation, make sure it is direct and to the point. Address only the issue outlined in the loan application and be sure to include all relevant information. Make sure the approving lender understands why you are requesting a loan and can make an informed decision. Additionally, the lender will want to know that you are taking responsibility for the issue. Finally, make sure to avoid using negative or blaming language and focus on highlighting the positive outcomes.
Conclusion
A letter of explanation for a mortgage is an important document to provide your lender when applying for a loan. It is important to understand when it is required and how to properly write it. Writing a clear, concise letter that explains the issue in a positive light can help your lender make an informed decision while considering your loan application.