In today's ever changing lending environment, there are still underwriting requirements that many borrowers do not understand the need for. Letters of explanation have become much more commonplace in today's mortgage approval process in the last 3 years. A letter of explanation can be required to explain a variety of issues.
Some of the most common needs for a letter of explanation are:
- Credit inquiries
- Derogatory items or late payments on credit report
- Previous bankruptcy
- Previous foreclosure
- Job gap
- Living rent free
- Motivation to purchase a new home when current home has not been sold
- Large deposits
These letters give the underwriters a clearer picture of each borrowers individual situation. The letters also give back up if fraud or misrepresentation is later discovered. This is especially true in the case of the motivation letter should occupancy fraud exist.
The credit inquiry letter is to attest to whether or not you have obtained or applied for any new credit recently. Having open accounts that are not yet on a borrower's credit report impacts their debt to income ratio. The underwriter is required to factor in any new minimum monthly payments for the new trade line.
When obtaining a mortgage, don't be surprised if you get asked to write a letter. It is very rare these these when at least one explanation is not required.