According to a piece in the Wall Street Journal, it is a common practice for underwriters to reach out to borrowers asking for letters of explanation sometimes referred to as “comfort letters” to firm up mushy spots in their knowledge of borrowers’ situations.
These letters are part of underwriters’ due diligence and offer insulation should Vellum ever come under scrutiny from federal or internal auditors. Reasons an underwriter might ask a borrower for a letter of explanation usually regard anything that would raise questions about a borrower’s ability to afford the loan.
For instance, if you were trying to purchase a home far away from your current workplace, an underwriter might ask for a letter of explanation, wondering if you are taking a new job or planning to telecommute. Things like sudden influxes of cash and gaps in employment can raise questions about whether there are other loans in the picture and if the income used to qualify for the loan will remain in place for the foreseeable future.
So what should you do if your underwriter wants to be pen pals? WSJ offers three tips for borrowers who need to write a letter of explanation:
Don’t panic: These letters are common. Just because you need to fill one out doesn’t mean your dreams of homeownership are over and done. Answering these letters can often lead to getting your application approved.
Address the issue: Be concise, date, sign and be accurate in addressing the underwriter’s concern.
Know what they can and can’t ask: Lenders can ask for explanations regarding the application, but by law they cannot ask about medical information, gender, age, religious or racial information. Using this kind of information to influence the application approval is prohibited bias.
How to Write a Letter of Explanation
Gather supporting documentation you’ll need to provide a complete and accurate explanation.
Format your letter in a business style; include your name(s), date written and contact information.
Address the letter to your mortgage loan officer or the mortgage company according to your loan officer’s instructions.
Limit your explanation to facts and dates. Avoid any temptation to place blame or rant about anything or anyone involved in the situation you’re addressing. Providing dates helps connect a timeline with the situation being explained.
Remember to include how and when the situation was resolved.
List any steps you’ve taken to ensure the situation does not happen again. “We now have an emergency savings account with enough funds to pay our bills for six months.”
All mortgage applicants should sign the letter of explanation.
Attach required support documentation to your letter, and note enclosures in your letter: “We’ve enclosed copies of George’s hospital discharge, his doctor’s work release letter and copies of February 2012 statements for our credit card and car loan that show each account is current.
Check your letter for clarity, spelling and grammar.
Don’t forget to remember our guidelines through closing as any changes to your financial picture during the loan process could effect your loan. If you have any additional questions, please feel free to reach out to your Vellum Loan Officer or Loan Manager for assistance!