Letter of Rationalization for a Mortgage: Template and Easy methods to Write One
Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our affiliate lenders that we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276 is referred to herein as “credible”.
After you apply for a mortgage, the lender will review your application and financial records to ensure that you meet the loan approval requirements.
If the lender finds information that sets off red flags, they can ask you for a letter of explanation to shed light on the problem – be it an employment gap, a derogatory mark on your credit, or an abnormally large deposit in your bank account.
Here’s what you need to know about statement letters, including how to write one:
What is a mortgage statement letter?
A statement letter is your opportunity to clarify any inconsistencies in your mortgage application and all aspects of your financial history that your lender needs to understand better before they can approve a loan for you.
After applying for a home loan, your application will go through the underwriting process. The underwriter will review your credit history, employment, tax returns, assets and debts in detail to ensure that the information is complete and accurate and shows that you have a low risk of credit default.
If something comes up that could disqualify your application, the insurer can ask for a letter of explanation to better understand the specific details of the problem.
Tip: The underwriter will double-check your creditworthiness, employment, and other issues shortly before closing the loan. Any changes that have occurred since the loan was approved may require an explanation before the lender approves your loan for finalization. So it is best not to make any changes to your finances until you are done buying a home.
If you’re looking to buy a new home, Credible can help you compare pre-qualified rates from all of our partner lenders in minutes. It’s easy and secure – and you don’t even have to leave our platform.
Credibility makes it easy to get a mortgage
Find prices now
Why you might need a letter of explanation
Almost every aspect of your loan application may require a letter of explanation, but most inquiries are related to credit, employment, cash reserves, or fraud protection.
Here are a few points that could lead your lender to request a statement letter:
Negative items on your credit report
Past credit problems may lead to a letter of explanation solicitation because it suggests that you have had difficulty managing your debt. These problems include:
- Late payments
- Collection items
- Debits
- bankruptcy
- A short sale or a foreclosure
Excessive credit inquiries can also be a red flag if they lead the lender to suspect that you were looking for credit because you were struggling to get approved.
Find Out: Can You Buy A Bad Credit Home?
Unusual or inconsistent work flow
You need at least two years of permanent employment, either in the same position or in the same field, to prove that your income is reliable. Some of the circumstances that make you appear riskier to the lender are:
- Job gaps or periods of unemployment
- independence
- Frequent job changes
- A new job in a different profession
Buy a home away from work
If your new home is more than 50 miles from where you work, your lender may suggest that you are buying a second home or investment property rather than a primary residence.
Lending standards are stricter for non-primary residences, and interest rates are typically higher.
Missing rental history
For first time buyers, lenders would like to see a history of on-time rental payments for at least the past 12 months. This is because inexperienced renters may not be prepared to suddenly take on a mortgage payment.
Large bank deposits, withdrawals, or wire transfers
Lenders want the money in borrowers’ checking and savings accounts to be “seasoned and raised,” which means that the money has been around long enough and its source is obvious enough to show that it is your money in comparison It is about gift money or a loan that you ‘must pay back.
Conversely, large withdrawals can lead the lender to think you are in a bind.
Mailing address inconsistency
Address discrepancies within a credit file are considered “high-level red flags” for mortgage fraud, warns Fannie Mae.
The lender needs a letter of explanation if they find inconsistencies in your identification documents, such as: B. A different address on your credit report than on your bank statements and tax returns.
Learn More: Credit Monitoring: Why You Should Use A Credit Monitoring Service
How do I write a statement letter
It is best to keep your explanatory letter short and to the point. Provide as much detail as necessary, but only include the specific information that the lender has requested. The idea is to make it easy for the underwriter to find the information they need.
Your letter of explanation should be factual in tone and structure. Here are some of the things mortgage experts recommend you include in the letter:
- The date you wrote the letter
- Name, mailing address and phone number of the lender
- Your full name and loan application number
- Your statement, with references to any supporting documents you are attaching
- Your postal address and telephone number
Now that you’ve gathered your information and thoughts, do the following.
1. Be honest about your financial situation
The lender already knows, or at least suspects, a problem with the application. This is not the time to try to convince them otherwise or find excuses. Politely state the problem, then move on to the explanation.
2. Keep it short
The underwriter wants to see all of the information they need to understand the problem, but that’s all they want to see. Keep your explanation short, specific, and to the point.
3. Provide evidence to support your statement
For example, if the lender thinks you have too much commuting from your new home, consider getting a letter from your boss or HR explaining the situation and attach it to your letter.
If you have been unable to work due to a prolonged illness, also include unemployment benefit certificates and / or medical bills with your letter.
4. Correct your letter for mistakes
A flawless letter shows that you took the underwriter’s request seriously. Also, be sure to use a professional tone throughout your writing.
Statement letter template
The content of your letter will of course depend on your specific circumstances. You can use the following sample letter and replace the information in brackets with your own information and explanations:
date
[XYZ Bank]
[123 Broadway]
[New York, NY 20021]
[555-555-5555]
[RE: Jane Smith’s mortgage loan application #123456]
Dear credit specialist:
I am writing in response to the insurer’s request for information regarding [my gap in employment] of [January 15, 2020 to June 15, 2020]. The reason for my absence from work was [the premature birth of my son on January 15, 2020].
To support my explanation, I have included the following documentation:
- [An insurance statement documenting that he was hospitalized from January 15, 2020 through April 1, 2020]
- [Certification of Health Care Provider for Family Member’s Serious Health Condition under the Family and Medical Leave Act form]
- [A letter from his pediatrician restricting him from attending daycare until June 15, 2020]
If you have any further questions, please do not hesitate to contact me.
With best regards,
[Jane Smith]
[123 State St.]
[New York, NY 20012]
[555-555-0001]
What to do if your declaration is rejected
If the underwriter rejects your statement, you have several options. First of all, you can submit a new letter with more detailed information. Add anything you might have missed the first time and additional documentation to back up your explanation.
If that’s not enough to qualify you for the loan, you can start from scratch and try a mortgage with another lender, but you may run into the same problem.
It is best to postpone your purchase while you improve your balance and / or resolve the issues that triggered the request for explanation. At least the next time you apply, the problems will be further in the past, so they may have less of an impact on the lender’s decision.
Compare multiple lenders
If your letter of explanation is rejected, you should try looking to another lender. Credible’s streamlined process can help with this. We make comparing multiple mortgage lenders easy. In just a few minutes, you can view pre-qualified tariffs and create a streamlined pre-approval letter without leaving our platform.
About the author
Daria Uhlig
Daria Uhlig contributes to Credible, which covers mortgages and real estate. Her work has appeared in publications such as The Motley Fool, USA Today, MSN Money, CNBC, and Yahoo! Finances.
Continue reading
Comments are closed.