A letter of explanation is one of the most important pieces to the puzzle of the home loan buying process.
Obtain a copy of your credit report
- Review each page of the report
- Highlight each derogatory account i.e. Tax Liens, Judgments, Bankruptcies, Late payments, Collections and Charge Offs
Address each delinquent/bad account
- Fully detail/explain any and all extenuating circumstances leading to the late payments
- Create a timeline of events of any challenges you may have experienced at the time
- Include dates
- Explain how this was unavoidable
- Explain any efforts you made to avoid the delinquency i.e. if you lost your job, did you search for jobs daily? If you had an unexpected medical expense, did you request for additional overtime at your job, etc.
Explain your recovery
- Fully highlight what you have done to recover from these circumstances
- Explain how there is an unlikelihood of these circumstances recurring
- Explain all saving measures
- Explain any sacrifices you have made – i.e. less vacations, etc
- This is of extreme importance as this validates your explanation. Some examples of supporting documentation are:
- Letter from physician explaining any medical circumstances
- Proof of Insurance coverage if a medical collection is erroneously reporting – (it is common to have collections on credit that should have been paid by the Insurance Company)
- Correspondence from various employers acknowledging receipt of job applications
Explain any compensating factors that could help your case. These could include: Length of job time, timely rent payment, timeline payments on other bills that do not report on credit such as utility accounts, car or rent insurance payments, etc.
A detailed letter of explanation can be the single influencing factor in loan approval. This is your chance to fully explain why you should be given a chance at homeownership.