Credit challenged borrowers often fall prey to predatory lenders as a last resort to buy their homes. But careful planning with a competent FHA lender can keep those buyers out of the financial lion's den, and a carefully written letter of explanation can go a long way toward getting a loan approved.

Obtain a copy of the credit report from the lender and ask the buyer to write an explanation for each derogatory entry as well as for recent inquiries. Be sure that he includes the following components for each entry and issue the following advice:

1. Cite the entry or inquiry first with the creditor name, the amount of monies involved, and the date(s).

2. Explain the history of the problem. Don't be timid about sharing the details of personal challenges. Be honest about the circumstances that led to your financial problems. If circumstances were beyond your control, give a brief history of the events leading to your inability to meet your financial obligations. Life impacting personal events and the emotions attached to them are important factors that an underwriter considers.

   On the other hand, if you were remiss in your obligations, and the problems were due to your own negligence, be candid and admit your mistakes. Follow this admission with a statement that you understand the importance of establishing a good credit profile and emphasize that you now place a priority on paying your bills on time. Remember, this letter is written for HUMAN eyes, not for a computer.

3. Describe the steps you took to correct the problem. "I paid the amount owed," or "I entered into a payment arrangement" are good starters, especially if you can provide documentation for your claims.

4. Close the letter with a paragraph that pulls it all together and describes a pattern of improved financial health habits. Project creditworthy loan performance and give the underwriter an "A" right here for approving your loan application!

5. Supply documentation to buttress your narrative:

   • Divorce matters can be documented with either divorce decree or separation agreement, court ordered documents for child support, tax documents for most recent year filing jointly, paperwork pertaining to arrearages in child support, and printout from domestic relations court showing either satisfactory child payment history or arrearages.

   • Job Loss claims can be supported with layoff notice, Unemployment Office records, and other proofs of dismissal.

   • Injury Resulting in Inability to Work can be shown with proof of Workman's Compensation and letters from doctor or employer about the injury.

   • Spousal Abuse can be documented with police reports, medical records, and Protection from Abuse orders from the court.

   • Business Failure is best illustrated with tax returns for the most recent year or proof that the borrower is no longer self employed (i.e. current pay stub from employer).

Published: September 26, 2006

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Frances Flynn Thorsen, e-PRO, RECS, REALTOR, is the author of HUD Homes for Sale - A Sales & Marketing Guide for Real Estate Agents and HUD Homes for Sale - A Complete Buyer's Guide. Fran has been a REALTOR in Bethlehem, PA, for 22 years, and has an extensive background in magazine publishing. She is a member of the Nat'l Assn. of Real Estate Editors and publishes several blogs including TheREALTYgram Blogger.