How to Craft the Perfect Explanation Letter
In the mortgage industry, it’s referred to as an Explanation Letter. After someone submits a loan application to a lender, the lender might want some further explanation regarding an item that appears on a credit report or some other piece of documentation in the file. While a bit unsettling, such a request is fairly common and is designed to comply with lending guidelines.
Explanation Letter Explained
Some letters are more important than others, but if a loan application has made it to the lender’s underwriter it’s almost a done-deal. Not always but most of the time, anyway. When you first submit your loan, we’ll review your application to see if anything is missing or needs some updating so by the time your loan is in the approval process, it’s mostly just record-keeping and ‘dotting the I’s.’
For example, you submit your application and provide the requested documentation. After a few days your loan makes it to the underwriter’s desk for review. It’s the underwriter’s job to make sure the loan meets the guidelines for the requested loan program. The request may seem a bit innocuous but if a request for an explanation letter is made, it’s really not an option to disregard. And, the explanation can’t be verbal, the explanation letter needs to be included in the file.
How it Works
A common explanation letter has to do with credit. Once a credit report is pulled and there is a late payment showing up on a credit report, that can trigger an explanation letter. Sometimes it might come across that the lender is having some serious issues with your approval when in reality it’s just complying with approval guidelines.
A credit report will show the payment history of someone’s revolving or installment credit account along with the current balance, highest balance and credit limits. Late payments are documented as more than 30 days late, 60 and 90. Say the credit report shows an automobile loan. The balance is $10,000 and the monthly payment is $400. If a recent payment was made more than 30 days past the due date, that late payment will show up on the report. Note here that payments made after the due date aren’t necessarily late according to a credit report as long as payments do not meet the 30 day threshold.
If a due date is on the 10th and the payment is registered as being made on the 15th, no harm and no foul. It’s anything beyond 30 that can issue a call for an explanation letter. Further, if those late payments were made within the past two years, that will require an explanation letter. Payments made five or six years ago will still be listed but lenders pay more attention to the most recent payment history.
A Few Common Examples
If you get a request for an explanation letter, don’t panic. Remember, the lender is just following lending guidelines. Your approval typically isn’t hanging in the balance.
Lender: Please provide an explanation letter for the late car payment appearing on your credit report.
You: I do not recall the reason why there is showing a late payment on my automobile loan.
That’s it. No need to provide any documentation as this explanation fulfills the guideline.
Other questions however can arise that are more serious in nature.
Lender: Please provide an explanation letter for the late car payment showing up on your credit report.
You: That car and the car payment were awarded to my ex and I am no longer responsible.
Lender: Please provide documentation verifying you are not responsible for the car payment.
Accompanying your explanation letter can be a copy of your divorce decree showing which spouse is responsible for which account. Yes, it is a letter and yes you’ll be asked to provide a written explanation signed and dated by you.
If you’re not sure how to respond to the request, just let me know, tell us what happened and we’ll help put together the perfect explanation letter for you. So relax, you’re almost there.