Creating a Comprehensive Explanation for Your Mortgage Application
Understanding the Mortgage Application Process
Embarking on the journey to find and purchase your dream home is an exhilarating experience. However, once you have identified the perfect property, the next crucial step is to prepare for the mortgage application process. To qualify for a loan, you must possess good credit, maintain a favorable debt-to-income ratio, demonstrate consistent employment, and have cash reserves on hand. Should any of these requirements be lacking, your financial institution may request a letter of explanation (LOE) to gain further insight into your financial situation and assess your loan eligibility.
Understand the importance of a letter of explanation and learn how to craft one effectively to enhance your chances of securing a mortgage approval.
Key Points to Consider
Underwriters may request an LOE for various reasons, such as negative credit history, changes in employment status, and unexplained sources of income. Do not panic if your lender requires an LOE, as it presents an opportunity for you to provide clarifications and offer additional details about your financial circumstances.
Why is a Letter of Explanation Necessary?
There are multiple reasons why an underwriter may ask for a letter of explanation from you. These reasons could include:
While the aforementioned reasons are common triggers for an LOE request, financial institutions may seek additional clarifications based on specific concerns detected during the mortgage application review process.
Addressing Negative Items on Your Credit Report
Instances of missed payments, high credit utilization, or other factors that adversely impact your credit score may raise red flags for lenders. Rather than outright rejection, your lender may opt to request an LOE to allow you to explain the circumstances surrounding the negative credit entries. Take this opportunity to provide a valid reason for any credit-related issues and clear up any misunderstandings.
Living Rent-Free and Employment Gaps
If you have been residing with relatives or friends to save for a down payment, your underwriter may require an LOE to verify your payment history and assess your financial stability. Similarly, prolonged gaps in your employment history may prompt queries from your lender. Use the LOE to explain reasons such as educational pursuits, family care responsibilities, or personal circumstances that contributed to these gaps.
Explaining Changes in Income
Stable income is a critical factor for lenders when evaluating your loan application. If you have recently changed jobs or experienced fluctuations in income sources, an LOE can help you clarify the reasons behind these changes. Provide detailed explanations for income fluctuations, such as job upgrades or beneficial career opportunities, to reassure your lender of your financial stability.
Sample Letter of Explanation
When drafting an LOE, maintain a factual, concise, and polite tone to address any concerns raised by your underwriter. Use the following template to create your personalized LOE:
Date:
Lending Company's Name
Street Address
City, ZIP CODE
Loan Number:
To Whom It May Concern:
I am writing to provide an explanation for the gap in my employment history as requested. During the specified period, I was enrolled as a full-time student at the University of California Los Angeles, as evidenced by the attached academic records. Please feel free to reach out if additional information is required.
Thank you,
Your Name
Your Address Line 1
Your Address Line 2
