Writing the Perfect Letter of Explanation

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.

Looking for an extra 27k? Start by Maximizing this year’s Tax Return!

It’s that time of year again.  We all need to calculate how much we will be getting back from Uncle Sam.  Have you planned what to do with your tax refund?  Are you interested in getting more out of this year’s refund?  If so, be prepared for some shocking numbers. 

Borrowers often overlook the value of extra mortgage payments.  There are a few things you can do to shorten the time until you are debt-free.  Yes, it is possible to own your home sooner by following a basic piece of advice.  Consider putting a portion your tax refund to good use this year by making an extra principal payment on your mortgage.

So, how much can you really save if you pay one extra mortgage payment each year?  Does $27,000 and 4 less years of mortgage payments sound like a good return?   Yes, that would be the savings if you have a home worth $250,000 with monthly payments of $1,190.  (If your house is worth more, you will save even more!) Taking a portion of your tax return each year equal to just one month’s payment would produce a quite a savings for borrowers, even if they are only paying 4% interest on their mortgage.   It might be a small sacrifice each year, but imagine how memorable those last 4 years will be with no mortgage payment in addition to a tax refund! Call today and learn how much you can save by making one extra payment with your income tax return.

APR vs Interest Rates: Which one is more important when shopping for a mortgage?

Everyone has received various credit card offers in the mail that state 0% APR for the first 6 months.  Consumers are conditioned to glance past the disclosure part of the offer in fine print explaining how the APR is calculated and simply recognize that it is a good deal…..at least for the first 6 months.  You might already know "APR" is an abbreviation for annual percentage rate and it indicates how much is being charged to borrow money. However, you might not be 100% sure how the credit card company is calculating each month.  

The interest rate that you are quoted when you apply for the mortgage is the cost you will pay to borrow the money for the home loan.  The APR represents the entire cost of the mortgage, including closing costs, and any other charges to get the loan.   Therefore, the APR is usually higher than the interest rate.  It might be less than one percent higher, but by law, the lenders must have full disclosure to the borrower under the Federal Truth in Lending Act.  It is actually wise to look at the APR, not just the interest rate, when applying for a mortgage.

Why do our law makers want Lenders to disclose this particular number?  APR is the basis for comparing certain costs of loans.  Savvy borrowers should not only compare the interest rates quoted from the Lenders, but focus on the APRs to get a fair comparison of total cost.

The example below will demonstrate just how important the APR is:

Borrower is comparing rates between two Lenders. The current loan balance is $200,000 and the home is worth $250,000. Let’s see how the offers compare: One Lender is offering a rate of 3.625% and the other is 3.75%. He is about to lock with the first Lender when he sees the APR and is wondering why it is higher than the agreed upon interest rate.

Lender 1: 30 year fixed rate mortgage, 3.625% with 1.5 points and $3800 Closing Costs. APR is 3.9. To cover the Closing Costs the new loan amount is $206,500. Based on 3.625% the Principal and Interest payment will be $941.75.

Lender 2: 30 year fixed rate mortgage 3.75% with 0 points and $2400 Closing Costs. APR is 3.84 and the new loan amount is $202,400. Based on 3.75%, even though the rate is HIGHER than the first Lender the Principal and Interest payment will be $923.05. Option two will save the Borrower $6,732 over the term of the mortgage.

By requiring Lenders to disclosure the APR on a loan, Borrowers will get the full picture of costs when comparing the actual APRs.  Reviewing the Good Faith Estimate, a borrower can compare and determine how other loan costs such as points can increase the APR.  Even though the first loan at the lower interest rate seems like a better option at first glance, it will cost MORE over the life of the loan.   If this particular borrower wants to save money, he should go with the second option. Even though the interest rate is technically higher, it is costing him less money for the same loan amount. 

Current Interest Rate Means "More House" for Buyers

Why do Mortgage Brokers and Real Estate agents track mortgage interest rates daily? The difference in just a few percentage points means a family might be looking for their range of affordable houses in two completely different neighborhoods or even zip codes.

If the typical American family makes $60,000 a year and has basic living expenses and a normal amount of debt, they can afford approximately $1,850 a month for their housing payment. (The calculation is based on $2,250 in total expenses, including a car and house payments.)  What does that translate into as far as how much home this family can afford?  Well, the answer depends on the mortgage interest rate at the time of application.  This integral number factors into each monthly payment, which in turn factors into the overall amount of home loan they are allowed to borrow.

How are these rates determined? And how can they change daily?  It is a complex formula based on the secondary market where mortgages are bought and sold.  Mortgage rates most closely follow the 10 Year Treasury Bond, but fluctuates as bond prices changes. The economy is also a factor and if it is slower economy, rates drop which encourages homeowners to buy.   Both Freddie Mac and Fannie Mae are government agencies that try to keep this secondary market stable.

Comparing this same family’s buying power now and in 2000, they could afford much more home now because the rates are lower.  In July 2000, mortgage interest rates were 8.5%, which meant they qualified for a $250,000 home.   If they put 20% down at 8.5%, they would have a $200,000 loan amount.  After taxes and an insurance escrow at $315 month, the payment would be $1852.83 a month.

This same family can now afford a loan for a $400,000 home.  If they put 20% down at 3.75%, they would have a $320,000 loan amount.  After taxes and an insurance escrow at $370 month, the payment would be  $1851.97 a month because rates have dropped. This scenario assumes the same income and debt ratio as the previous example.  You can understand why anyone working in the real estate profession would be tracking these rates closely!  

Lord Mortgage provides daily, live rates so you can predict the best time to buy a home or even refinance your current home.  Add this site to your favorites, so you can also stay ahead of the curve http://www.lordmortgage.com/#!rates/c11su

Shoppers and Well-Meaning Parents Beware of Credit

Many of us do not quite understand how the credit companies come up with a "magic credit score" that determines how much we can borrow and at what rate.   Moreover, borrowers do not realize how important it is to maintain that number in between the time the Loan Office issues that pre-approval letter and the time the borrowers close on their mortgage. 

I have had borrowers no longer qualify for a mortgage because they decided to charge all the furniture they need to buy for their new home.  They got caught up in the moment, not realizing there will be no place to set up all those new leather recliners and matching love seats after their credit score dropped below minimum number needed to qualify for their loan.  Another borrower forgot to mention they loaned their daughter an extra $3,000 for room and board at the beginning of the semester, which depleted one of their savings accounts.

All of these actions affect their creditworthiness.  When you are pre-approved for a mortgage, the approval process is based on a snapshot of your financial situation at that time.  Borrowers provided a bank statement that said they had $5,000 in their savings, which would cover all their closing costs.  After these well-meaning parents loaned their daughter college funds, they no longer have enough liquid assets to cover the out of pocket costs for closing.    The savvy shopper might have gotten a great deal on furniture, but the hidden cost was a decrease in her credit score.

Borrowers must remember to maintain and protect their credit at all cost.  You might feel like you are putting life on hold for a while, but getting the home of your dreams will be worth the short-term sacrifice.