A letter of explanation template is a sensitive document used to describe any situation. Someone would ask you for such a letter in different types of situations. You have to be very careful while composing your letter of explanation. By using improper terms or statements, you may lead to issues or miscommunication. The letter can assist you in describing yourself better to the recipient if it is properly worded and structured.
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What’s a letter of explanation?
Mortgage lenders request a document named a letter of explanation when they want more details regarding your financial situation. A letter of explanation might be requested by the underwriter in case they run into questions regarding your finances during the mortgage approval process.
How a letter of explanation works?
A letter of explanation is a precise document you would send to someone like a lender. For example, before the lender allows you to borrow money, he may ask for a letter of explanation for derogatory credit.
In some cases, lenders also ask for a letter of explanation for the mortgage. They ask it for clarification on problems like insufficient funds charges on a checking account. The letter will enable him to take note of any modifications in your income. During the approval process of a mortgage, you can give a rental history or any other topic which might need an explanation.
Why do you require a letter of explanation?
When you are applying for a mortgage, people known as underwriters evaluate your finances. They may need you to submit financial documents. These may include pay slips, tax returns, and more to give a complete look at your current financial situation.
Underwriters follow specific rules and guidelines just like any other professional. So, they may ask you to submit a letter of explanation for the mortgage if they discover something unusual from their assessment. Furthermore, you may also have to give a letter of explanation in the following situations;
- In case, you had a late payment on your house or on your rent
- In case, you have a joint account with someone else
- When you are filing for bankruptcy
- In case, you had a recent large deposit on your savings account
You may have to give a letter for clarification in any situation that may raise a flag during the review of your mortgage application process. Aside from the letter, to support your explanation, you may also have to give other types of documents.
There is also a letter of explanation for derogatory credit that you have to submit when there are any problems with your credit report. The issues are very minor most of the time like a discrepancy in the personal details provided. But, you may have to give a longer letter along with any required documentation in case the issue is more significant.
The letter of explanation is also asked by some underwriters where there’s something in their client’s bank account that raises any questions. For example, you may also have to justify the circumstances, if there was a radical change in your account in the past few months.
Hence, you would need to compose a letter of explanation in different types of situations and circumstances. If you are composing such a letter first time, then download this letter of explanation template as a reference.
How to write a good letter of explanation?
For an explanation letter, you received a request from an underwriter or loan officer. Many people don’t know what to write in such a letter. But, you have to keep in mind that it is an important piece of supportive information that goes along with a typical mortgage application. Due to this, you have to make sure that you compose the letter completely and accurately.
You have to remember that lenders will scrutinize all of the aspects of your financial life if you plan to apply for a loan. You have to send copies of your financial documents upon application.
The underwriters are the people in charge of approving bank loans. It is the requirement of their job to compare your financial documents with the instructions as set by the bank. By doing this, they will identify whether or not you should get approval for the loan. The underwriter will ask for an explanation or a clarification for you to fill the gaps in case there’s something unexplainable in your documents.
Additionally, the letter of explanation is used for deposits, to explain conflicting information, and more. You can even use the letter to describe circumstances like bankruptcies or late payments. When writing this type of letter, you should follow the below steps;
- Start the letter with the date, salutation, and introduction of the situation.
- Give a precise but detailed description without having to include unimportant terms and phrases.
- To rectify the error or to complete the missing information, the steps you have taken, explain them.
- Specify your current situation by using the facts only.
- After solving the issue, give a description of the possible outcome.
- In the letter, just give truthful and accurate information.
Be as specific as you can while writing the letter. If required, to strengthen your clarification, use actual dollar amounts and dates. For instance, explain all of the steps you’ve taken so the problem won’t arise again in case you’re making an explanation for a financial issue.
Keep in mind that this type of letter can assist the lender in making a favorable decision for you. The letter will only complete your financial picture for the lenders to understand whether they have to approve your application or not. You may ask any Loan Officer at your bank for guidance in case you have any questions regarding the requirements or the need for the letter. Moreover, don’t make your letter too lengthy. A few sentences are enough to get your point across. Also, you don’t have to give more details aside from what they requested from you.
What are the documents to attach to your letter of explanation?
A lot of people would consider writing a letter of explanation a critical task. But, you don’t have to panic when an underwriter asks for a letter of explanation. It doesn’t have to be stressful to write this type of letter. Remember that the underwriter only requests for the letter so that you can demonstrate any unusual scenarios or issues in your loan application.
You just have to provide a description and you are done. You may have to attach some type of documentation to the letter in some scenarios. These are essential, particularly when you’re asked for them. Here are some types of documents to include;
- You can attach a copy of your hospital bill to your letter in case missed work for a long period of time.
- You can attach a copy of the obituary to your letter if you missed work because there was a death in your family.
- Send a copy of the check along with the letter in case you got an inheritance from one of your relatives and you’ve deposited it into your account.
If your letter of explanation is rejected, then what to do?
It’s not necessarily the end of the line if the underwriter rejects your letter of explanation. Rather than this, consider submitting a new letter of explanation with more information regarding your finances. The additional information will be enough to sway the underwriter in some cases.
Moreover, consider looking for another mortgage lender if you still aren’t approved for the mortgage. You may find someone there that is willing to work with you. But, unfortunately, you have to run into similar approval problems with any loan officer out there.
It is time to work on resolving the issues the underwriter asked about in case you decide to try a different strategy. For instance, for a better chance of approval in the future, you can work on improving your credit score or enhancing your income. Also, you could lead to lower interest rates on your loan by having a higher credit score.
In conclusion, a letter of explanation template is a precise document that you can use to demonstrate any situation. This letter is very effective and proves useful in various circumstances. Also, don’t have to be stressful while writing this type of letter.