Understanding the Role of a Letter of Explanation in the Home Loan Approval Process

When applying for a home loan, your Mortgage Advisor at CrossCountry Mortgage acts as the principal contact, assisting you with any queries or uncertainties. Yet, numerous departments work behind the scenes to ensure your loan gets approved. At times, these departments may request additional information or clarification during the loan approval process. For example, they may need to understand circumstances such as a period of unemployment, late credit card payments, or other financial activities that might appear unusual. This communication typically takes place during the underwriting process.

The underwriter's role is to evaluate the potential risk the lender will undertake if they approve your home financing. They accomplish this by verifying that your financial situation aligns with the specified rules and guidelines of the loan program, thereby ascertaining your eligibility for the loan.

The Role of a Letter of Explanation

Underwriters often need more than what's available on your financial documents to comprehend your entire financial history. For instance, they may notice a two-month gap in your employment, which might just be a break you took between jobs. That's where the letter of explanation comes into play.

If an underwriter requests more information, there's no need for alarm, nor should you presume that CrossCountry Mortgage will be unable to fund your loan. Remember, each loan program comes with its own set of rules and guidelines that you must meet for approval. Many of these guidelines require lenders to account for specific items on a borrower's financial reports. Let's delve into a few reasons that might trigger this need for clarification.

Income Considerations

Traditional employment that guarantees a steady monthly income is not the reality for every borrower. If you're a freelancer, business owner, or have a history of irregular income, your loan approval process may get complex. In such cases, the lender might ask for a letter of explanation, complete with supporting documents, that outlines your income sources and the amount you earn. Some loan programs also necessitate lenders to authenticate household income and whether all adult household members contribute financially.

Bank Account Activity

The loan approval process entails validating all income sources. Large transactions in your bank account, including significant deposits or frequent withdrawals, might necessitate an explanation. If you plan to use gift funds for a down payment, a letter of explanation will likely be needed to clarify the origin of these funds.

Employment Gaps and Income Changes

Recent layoffs, a decision to pursue further education, or even a promotion or salary hike could potentially be seen as red flags by an underwriter. A letter of explanation that details such changes in employment or income can assist your lender in verifying your qualification for the loan.

Credit Issues

Your credit score directly reflects your ability to repay debts consistently and punctually. Hence, any negative items on your credit report, such as late or missed payments, an excessive number of credit inquiries, or too many open lines of credit, might require further clarification.

Drafting a Letter of Explanation

If your Mortgage Advisor or an underwriter from CrossCountry Mortgage requests a letter of explanation, ensure that you include:

• The date
• Lender's name, mailing address, and contact number
• Loan number
• A concise, detail-oriented explanation (including dollar amounts, dates, account numbers, etc.)
• Signed and printed name
• Printed name of your spouse/partner/co-borrower
• Your full mailing address and contact number
• Relevant supporting documents

Here's a template to guide you:

[Date] CrossCountry Mortgage [Address] [Phone Number] RE: [Your Name], Loan Application #[Application Number]

To whom it may concern,

I'm writing this letter to clarify ______________ during the period of ______________. This situation arose due to ______________. Please find enclosed my supporting documents, which include _______________.

[Offer a comprehensive explanation, detailing the names of employers or banks, account numbers, dates, etc., and clarify why this circumstance should not negatively impact your capacity to repay a home loan.]

Best regards, [Your Name] [Your Address] [Your Phone Number]

Whenever you're prepared to apply, CrossCountry Mortgage is ready to assist! Get in touch with us today for more information.