You may be asked to write a letter of explanation for a mortgage for several reasons. Here are some common examples of reasons a bank may request an explanation letter:
Negative Items on Credit Report
Late payments, high credit utilization, and other factors may negatively affect your credit score, which may cause concern for the bank. However, sometimes the bank may ask you to clarify these matters further. You may have valid reasons for the negative items on your credit report, and the explanation letter outlines those reasons and explains the situation. For example, a single late payment reported may be an error.
Living Without Paying Rent
Are you staying with friends or family to save money for a down payment? This may show a lack of payment history when it comes to your primary residence. The lack of a payment history could raise concerns for some lenders because they want evidence of your ability to make monthly payments reliably. In this case, the explanation letter should come from the person who owns the home or property you are living in. They can confirm that you have lived in their home without paying rent and should specify the duration.
Long Employment Gaps
Banks want to ensure that you can repay the loan, which means income stability is very important. If you have had long periods without work, they will want to know why. Typically (and this depends on the bank and the type of loan), a bank will request clarification if you have been unemployed for 30 to 60 days in the recent past. You may have a good reason for not being employed for a long time. Maternity leave, time spent on education, business failure, taking care of a loved one, and other situations can be clarified in the explanation letter.
Change in Income
Again, banks want to see income stability. Therefore, if you have changed jobs or have unexplained cash flow, the underwriter may question the reason. You may have chosen a new job to increase your income, or you may have been attracted to the better benefits at another company. You can detail the reasons behind those income changes in the letter.
Example of an Explanation Letter
Writing an explanation letter is straightforward and easy. The goal of the letter is to be factual, clear, concise, and polite. Remember that the explanation letter is merely a clarification that allows you and the underwriter to address any concerns in your application. Use the template below to create your explanation letter by replacing the details with your own:
January 1, 2022
Ideal Loan Company
123 Street
Example City, Zip Code
(999) 555-5055
Subject: Your Name Loan Number: 557904, Explanation Letter for Employment Gap
To Whom It May Concern:
I am writing to you regarding the explanation letter you requested concerning my employment gap. During the period in question, I was attending UCLA as a full-time student. I can provide my academic records to verify this. Please let me know if you need any further information.
Thank you,
Your Name
Your Address Line 1
Your Address Line 2
Source: https://www.thebalancemoney.com/how-to-write-a-mortgage-letter-of-explanation-5198231
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