Some Explaining to Do

Written by Posted On Thursday, 10 June 2021 00:00

Okay, there’s this guy who’s 48 years old. Owns his own home, has a paid-for car and a few credit cards. He gets excellent rates because he’s taken care of his credit profile over recent years. Over the long haul however it always wasn’t that way. He let some accounts go a bit delinquent. Not a lot, but didn’t pay some of his credit accounts until more than 30 days past the due date. He wasn’t unemployed or anything but just didn’t pay much attention to paying his bills on time. He didn’t default on anything, it’s just that he wasn’t as timely as he should be. 

When he applied for a mortgage for the first time, he was somewhat shocked that the interest rates quoted to him were a bit higher, sometimes much higher, than what he was seeing on the internet. The loan officer at the mortgage company explained to him why his scores were deflated and put him on a path to credit recovery. For the next year or so, he did pay attention to his credit accounts and soon his credit scores were back to where they needed to be.

Soon thereafter, he decided it was time to apply for a new mortgage. He submitted his application along with the necessary supporting documents. He provided his paycheck stubs, bank statements, tax returns and the like. He knew his credit had improved so he was waiting on what the new mortgage rate would be. He very soon got his loan preapproval along with a caveat: please explain the late payment on your automobile loan from last year. Seriously? Almost perfect credit for the past two years and the lender wants an explanation about one single late payment from a year ago?

Many who find themselves in such a situation can relate. Who really cares about a single late payment when the overall credit profile is very good? Actually, several loan programs have guidelines that do require the applicant to provide a written explanation about the isolate late pay. 

More often than not, whatever caused the late payment was long forgotten, anyway. Who really cares? A new mortgage is being held up because one payment made more than 30 days past the due date is causing a holdup?

Yet the lender is simply following guidelines. It’s really not a situation of the lender reviewing the explanation to determine if the explanation holds water. What if the explanation isn’t good enough? If he had fallen ill and simply forgot to make the payment, will the lender want to see records of doctor visits and/or medicine prescribed?

In reality, the lender doesn’t care. The lender simply must comply with the investor’s guidelines in order to sell the loan. What explanation in this situation would pass muster? ‘I forgot to put a stamp on the envelope’ or ‘My internet was down on the day I was paying bills and couldn’t access the site’ or some such. There really doesn’t need to be a valid explanation with supporting documentation included with the loan application. Rather, a simple, ‘It’s been so long I really couldn’t remember’ will suffice. If you’ve been asked for an explanation letter, don’t sweat it. Just provide an explanation to the lender and move on.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending. 

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country.