Mortgage Letter of Explanation
Contributed Article : Letter of Explanation
Letter of Explanation or LOE: A letter which describes and explains a specific situation, document or service. A letter of explanation may be written by a mortgage applicant's employer, family member, creditor, attorney, accountant, or the borrower themselves, depending on what the letter explains.
The key to writing an effective letter of explanation is to understand what the underwriter of your loan wants to see. A request for a letter of explanation is made when something is seen by the underwriter of the loan as being an impediment to approving you for refinancing or purchasing a home under the terms of your application. If you can determine what the condition is that they are asking you to explain, you stand a much better chance of effectively composing a useful letter. Personal appeals rarely move underwriters, as most of them are motivated sufficiently by the financial incentives to approve as many loans as possible. What they want from you is something that explains away a situation which would cause them to otherwise hold up approval. So if you are asked to provide a letter of explanation regarding the use of the cash you are taking out of the properties, remember what you wrote on your application, and remember what they don't want to see. They want to see that you are putting the money to good use, and that more than anything else, you are NOT going to use this money to go out and get another loan (that's the cardinal sin of borrowing, chaining debt). Knowing this, you can write a good, honest letter of explanation, which you keep short and to the point, and clear the "condition" of approval.
The most commonly written letters of explanation revolve around explaining minor derogatory or detrimental consumer credit issues, for example late payments on credit cards or installment loans, including student loans. Collections and late payments which you are contesting or have contested successfully with the creditors and the credit bureaus may also be explained with any correspondence attached, and may help you in removing these items from your credit report.
A Letter of Explanation is generally mandatory if your credit history contains a bankruptcy, foreclosure or judgment. Multiple late payments, loss of income, or any major or sudden changes to your financial situation will also require explanation and supporting documentation.
In refinance transactions, you may be asked to explain your reasons for refinancing, the purpose of which is to pass a "benefit to the borrower test" required in many states, apparently to protect you from yourself. In these cases, a letter of explanation should prove a Net Tangible Benefit to you, the borrower.
Business owners and borrowers who are reimbursed for business related expenses which show up on their credit reports in their own name, for example personally guaranteed company credit cards, car leases and loans, and pied a terre lodgings should write letters of explanation, supported by cancelled checks or payment receipts from the business showing payment for these items to remove them from personal debt to income ratio calculations. Failure to do so may result in denial of your loan application. Self employed persons should only refinance with a company having special expertise in small business refinancing.
If you have multiple properties, and need to prove that one is your primary residence, a letter explaining that you reside at the property in question and spend more than half the year there, or otherwise meet the legal tests for residency, would be beneficial.
Letters of explanation may be requested for a variety of reasons, however the best policy is always to ask your refinancing consultant or analyst to explain exactly what a question means, so you can best explain the answer. And honestly, if you're reading this, it's a solid indicator that your current mortgage company is not capable of meeting its fiduciary responsibility to you as a client. Give us a call and we'll try to straighten things out.
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Other Info on Mortgage Letters of Explanation:
Letter explaining a specific situation, document, or service. Usually from a borrowers employer, family member if the borrower is living with them, or from the borrwers themself.
Bankruptcies, foreclosures and judgments may all require a letter of explanation.
Sometimes we may help you overcome minor credit blemishes with a LOE (letter of explanation.)
If your lender asks you about execessive inquiries to your credit report, you may need to provide a letter of explanation citing that your were shopping for a mortgage at that time.
Often times it is needed to explain late payments or why you are in a current negative financial situation.
And in most cases this is just a formality and doesn't have to be a short story. Usually a couple of sentences will be able to explain enough to the lender.
Lenders will sometimes require a letter of explaination if you have a period of unemployment in the recent past.
Home buyers who have difficulties securing home financing due to some negative credit impact can sometimes acquire a mortgage loan with a Letter of Explanation. The LOE must explain the cause of the credit blemishes, such as a divorce. The LOE must also convince the lending banks the unlikelihood of reoccurences.
Disclaimer: The opinions expressed in the Contributed Articles section of this website may have been contributed by independent third parties and are not necessarily those of Envision Lending Group / Refinance One. Any enquiries regarding the content of these articlees should be directed at (212)537-6026.