What is a mortgage letter of explanation?

A mortgage letter of explanation is written by someone attempting to borrow money and explains a situation that could present lender risk. When risk is evident, mortgage underwriters often require a letter of explanation before they approve a loan.

A letter of explanation should be short and simple, but it needs to contain all the information the underwriter is asking for. Maintaining organized financial records helps the borrower when compiling the requested information.

A mortgage underwriter asks for a letter of explanation to explain late payments, past-due amounts shown on credit reports, multiple inquiries on credit reports, cash-out refinancing or the purchase of a second primary residence.