How to Write a Letter of Explanation for a Mortgage

Writing a letter of explanation for a mortgage might not be at the top of your list of fun activities, but it’s an important step in the home-buying process. These letters are your chance to explain any financial hiccups or discrepancies in your credit history to your lender. But don’t worry. It’s not as daunting as it sounds. In this post, we’ll break down what these letters are, why they matter, and how you can craft one that’s clear and convincing.

Why Lenders Need a Letter of Explanation

When you apply for a mortgage, lenders scrutinize your financial history to assess your ability to repay the loan. If they come across any red flags, like late payments, gaps in employment, or unusual deposits, they might ask for a letter of explanation. The purpose? To give you a chance to clarify these anomalies and reassure the lender that you’re a reliable borrower.

Think of it this way: lenders are like detectives piecing together a financial puzzle. Your letter helps fill in the gaps and provide context. After all, life happens, and sometimes financial decisions or situations don’t fit neatly into a credit report. By explaining the "why" behind the numbers, you help lenders see the complete picture.

Common Reasons for Writing a Letter of Explanation

There are several scenarios where a lender might request a letter of explanation. Here are a few common ones:

• Late Payments: Whether it‚Äôs a missed credit card bill or a late mortgage payment, lenders want to know why it happened and if it‚Äôs a recurring issue.
• Credit Inquiries: Multiple credit checks in a short period can raise eyebrows. You‚Äôll need to explain what prompted these inquiries.
• Employment Gaps: A break in your employment history can signal instability. Clarifying the reason for the gap and your current employment status is crucial.
• Unusual Deposits: Significant or unexpected deposits in your bank account need clarification, as lenders want to ensure these funds are legitimate.
• Address Discrepancies: If your current address doesn‚Äôt match the one on your credit report, lenders might ask why.

While these are some of the most common reasons, any significant change or inconsistency in your financial profile might prompt a request for explanation.

Crafting a Clear and Concise Letter

Alright, you’ve been asked to write a letter of explanation. Now what? The key is to be clear, concise, and honest. Here’s how to structure your letter effectively:

1. Start with a Simple Salutation

No need for anything fancy. A straightforward "Dear [Lender's Name]" will do. If you don’t know the name, "To Whom It May Concern" is acceptable.

2. Briefly Introduce Yourself

Begin by stating your name, loan application number, and any other pertinent details that identify you and your application. This helps the lender quickly connect your letter to your application.

Dear [Lender's Name],

My name is Jane Doe, and I am writing in response to your request for further information regarding my mortgage application (#123456) submitted on [Date].

3. Get Straight to the Point

In the next paragraph, clearly state the issue or discrepancy the lender identified. Be honest and straightforward, providing context where necessary.

During the review of my credit report, I understand there are concerns regarding a late payment for my credit card account in March 2023.

4. Provide a Detailed Explanation

Here’s where you give the backstory. Explain the circumstances that led to the issue. Were you between jobs? Did an emergency arise? Keep it factual and avoid unnecessary details.

In March 2023, I was transitioning between jobs, which led to a temporary cash flow issue. As a result, I was unable to make my credit card payment on time. However, my payment history has been consistent and timely since then.

5. Reassure the Lender

Assure the lender that the issue was a one-time event or has been resolved. Highlight any changes or steps you've taken to prevent a recurrence.

I have since secured a stable position at XYZ Corporation, and I have set up automatic payments to avoid missing due dates in the future. My financial situation is now stable, and all accounts are current.

6. Close with Gratitude

Wrap up your letter by thanking the lender for their consideration and reaffirming your commitment to the mortgage process.

Thank you for your understanding and consideration. I am committed to maintaining a responsible financial profile and look forward to the opportunity to proceed with my mortgage application.

7. End with a Formal Closing

Use a polite closing such as "Sincerely" or "Best Regards," followed by your full name and contact information.

Sincerely,

Jane Doe
[Your Contact Information]

Additional Tips for Writing Your Letter of Explanation

While the basic structure is straightforward, here are some extra tips to help your letter stand out:

• Be Honest: Always stick to the truth. Lenders have ways to verify the information, and any dishonesty can backfire.
• Be Professional: Though the tone should be conversational, maintain professionalism. Avoid slang or overly casual language.
• Use Clear Language: Avoid jargon or overly complex words. The goal is clarity, so keep it simple.
• Stay Positive: Even if the situation was stressful or unfortunate, focus on the resolution and positive steps you‚Äôve taken.
• Proofread: Typos or grammatical errors can distract from your message. Consider using Spell to ensure your letter is polished and professional.

Handling Specific Situations

Different situations call for slightly different approaches. Here’s how to tackle a few common scenarios:

Late Payments and Credit Issues

When addressing late payments, acknowledge the issue upfront and explain the cause. Highlight your otherwise good payment history, if applicable. Lenders appreciate transparency and accountability.

I acknowledge the late payment on my account in February 2023. This was due to unforeseen medical expenses. I have since caught up on all payments and adjusted my budget to prevent future occurrences.

Employment Gaps

For employment gaps, focus on what you were doing during the gap and how it positively contributed to your current situation. Whether it was additional training, freelance work, or personal reasons, give context.

I took a brief break from full-time employment from June to August 2023 to complete a certification program that has since enhanced my skills and contributed to my current role at ABC Company.

Unusual Deposits

If you have unusual deposits, explain their origin and legitimacy. Lenders want to ensure these funds are not loans or hidden debts.

The deposit in question on July 15, 2023, was a gift from a family member to assist with my home purchase, fully documented with a gift letter included in my application.

Using Spell to Streamline the Process

Writing a letter of explanation doesn’t have to be a solo endeavor. With Spell, you can draft, edit, and polish your letter much faster than traditional methods. Spell’s AI capabilities mean you can create a well-structured first draft in seconds and then refine it with ease.

Here’s how Spell can help:

• Quick Drafts: Describe your situation and let Spell create the initial draft.
• Easy Edits: Make changes using natural language prompts, without leaving the document editor.
• Collaborative Features: Share your letter with advisors or family for feedback, all in real time.

Practicing Empathy and Patience

It’s easy to feel frustrated when asked to explain financial blips. But remember, lenders are just doing their job to ensure they’re making sound lending decisions. Approaching this task with empathy and patience can help you write more effectively.

Consider how you would feel in the lender’s shoes. This perspective can guide you in crafting a letter that not only addresses their concerns but also strengthens your application.

Preparing for Potential Follow-Ups

Sometimes, your letter might lead to more questions. Be prepared to provide additional documentation or clarification if needed. This could involve bank statements, pay stubs, or letters from employers or family.

The more organized you are with your records, the easier it will be to respond promptly. This not only speeds up the mortgage process but also demonstrates your reliability and readiness to the lender.

Tackling Multiple Issues in a Single Letter

If you have multiple issues to address, consider writing separate paragraphs for each one. Start each section with a brief summary of the issue, followed by your explanation and resolution. This structured approach makes the letter easier to follow and understand.

In addition to addressing the late payment in March 2023, I would like to explain a credit inquiry from April 2023. This inquiry was the result of shopping for better insurance rates, which did not result in additional debt.

By compartmentalizing each issue, you help the lender process each point without feeling overwhelmed by information.

Final Thoughts

Writing a letter of explanation for a mortgage doesn’t have to be stressful. By keeping it honest, concise, and positive, you can provide the clarity lenders need to move your application forward. And if you need a little help along the way, Spell can make the process faster and easier, turning hours of work into minutes. Good luck with your home-buying journey!