I was in Chicago this past week giving a speech to some mortgage industry professionals. We discussed the differences in mortgage lending over the past ten years or so. One of lending’s old guidelines, that of Credit Explanations, had been mostly tossed to the wayside in today’s lending environment. When the speech was over, I naturally gathered with some of the attendees and we shared some of the credit explanations given to us over the past decade and had a lot of fun doing so.

From an underwriting standpoint, a Credit Explanation is a statement to an underwriter or lender explaining the cause and circumstance of a negative credit item. Nowadays, one is either approved or they’re not, forget the explanations. They’re rarely used. For instance, let’s say that 2 years ago you had a 30-day late payment on one of your credit card accounts. In the olden days, a lender would want you to write a letter explaining why you were late and why you won’t be late in the future.

It didn’t really matter how big, small or how old the account in question was, the guidelines specifically stated that any derogatory must have an explanation. And some of ‘em were pretty goofy.

There was a guy buying a home in California. I recall that he was an attorney and not only was the house he was buying big, so was his down payment. It was a jumbo loan at the time and he bought it for around $800,000 and put half down. His loan was for a fixed rate jumbo mortgage of $400,000. He had excellent credit but he also had a single late payment on an auto loan about two years earlier. I called him and said that although I know this will be a pain, he still needed to provide a written letter explaining the late payment. He responded:

“This letter is to explain why I was late on my car payment of $285.55 in January the year before last. I understand that my new home loan hinges on whether or not my explanation is acceptable to your institution. Even though I have an excellent credit history and I’m putting half of my own money into the house I understand that you need to know why I was late.

The answer is that I simply don’t know. I’ve gotten over it, I hope you can to.”

The guy got the loan.

Another couple had the unfortunate incident of having a bankruptcy on their credit history. This definitely required some explanation, and it was something that needed to be documented in the file.

“Dear Underwriter- We had to file bankruptcy due to the fact that we had more money going out than we had coming in. This naturally made us behind on every bill all the time so instead of paying everyone back we filed for bankruptcy. But that should not concern you because we can’t file for another seven years so your money should be safe at least until then.”

They didn’t get the loan.

When another couple was asked for the reason for a bankruptcy, they responded, “The lawyer was having a sale on them.”

Finally, a lady who had recently gotten out of college was buying her first home. And as with many grads, she had more than a little student debt and had fallen behind on several accounts. When asked why she was late on her student loan accounts she said: “When I was a student, I took out these loans to pay for college. They are deferred loans. That means I don’t have to pay them back.” Actually, deferment means you have to pay them back, just not right away. Something she apparently didn’t understand.

Credit explanations are mostly unheard of now, as loan decisions are usually made without them. Most of the time when they were used, they were used correctly. Still other times they were used, just not the way they were intended.

Published: May 9, 2003

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, a veteran Mortgage Banker, successful Real Estate Consultant and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, Who Says You Can't Buy a Home!, and Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You, is a former columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past President of the Austin Mortgage Bankers Association.