You just received an email from your Loan Officer asking for a Letter of Explanation. Many borrowers have no idea what should be contained in that letter or even more importantly, why it is required.
Lenders scrutinize every aspect of your financial life when you apply for a loan. You probably already sent in copies of all your bank documents, taxes, W2s, etc. Why would they be asking for more information? Underwriters are the people that “approve” the loan for the bank. They compare their guidelines and your documents to determine if you fit the criteria to borrow the amount you requested. If something cannot be explained in the loan file, then they will ask for information to fill the gap and complete the loan file. That information can come in a form of a Letter of Explanation. These letters are then retained in case the Government or another Underwriter has to review the file. Missing or incomplete files can mean penalties for the banks.
For example, you provided bank statements for the last year. The Underwriter noticed a large deposit in your saving account in June 2014. On the bank statement, it is simply listed as a deposit and is not categorized as a normal direct deposit from your company. When asked, you immediately recognize the large deposit was the money from the personal sale of your boat. The Loan Officer will then have to confirm it was money from the sale and not money someone had loaned you to help pay for the house. You need to create a simple “Letter of Explanation” stating this was from the sale of your boat and you no longer have the receipt of sale available. You only need a few sentences to explain this and then most importantly, your signature.
These letters are almost like sworn testimony. Perhaps you lost the receipt of sale or it got destroyed. It is hard to replace that receipt, but the bank is willing to “take your word” in the form of a Letter of Explanation. They can be used not only for deposits, but to describe conflicting addresses, names or employers that appear on your credit report. Letters can also be used to explain the circumstances surrounding late payments or bankruptcies. What information should be provided? Start with a date and greeting and and introduce the specific issue or incident with as much detailed information as possible.
April 22, 2015
To Whom It May Concern:
I am writing to explain the deposit of $6,700 in my Hometown Bank Account on 6/3/2014. I deposited the funds received for the sale of my 2013 Nitro Z Boat to Tom Smith on June 2, 2014. I no longer have a receipt for the sale and the company that transferred the title is no longer in business.
Sincerely,
Eager Borrower (and spouse name if joint application)
Be as specific as you can and use actual dates and dollar amounts. If the letter is describing a late payment or financial issue, describe the steps you have implemented so it won’t happen again. For instance, you can describe the late payment of medical bills and then follow up by saying this debt has been entirely repaid and you have kept up with all new credit obligations since that illness.
Understand, Letters of Explanation only help Lenders make decisions for marginal applicants; they are not going to be a replacement for Borrowers with insufficient credit or income to qualify for a loan. In essence, they provide the Lender with a more complete picture. If you have any concerns about writing these letters, always ask your Loan Officer for guidance.
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