MortgageReal Estate

Pen pals with your mortgage lender? Yeah, it’s a thing

Life is complicated. When underwriters have questions, they might reach out to you

Did you know that underwriters often reach out to borrowers via letter?

According to a piece in the Wall Street Journal, it is a common practice for underwriters to reach out to borrowers asking for letters of explanation sometimes referred to as “comfort letters” to firm up mushy spots in their knowledge of borrowers’ situations.

“We try to connect the dots using data, and we think that makes the application process more robust,” Bill Banfield, executive vice president of capital markets for Quicken Loans told WSJ.

“But when you need a little help from the client to connect those dots, letters of explanation are a way to help an underwriter interpret something.”

These letters are part of underwriters' due diligence and offer insulation should their firms ever come under scrutiny from federal or internal auditors.

Reasons an underwriter might ask a borrower for a letter of explanation usually regard anything that would raise questions about a borrower’s ability to afford the loan.

For instance, if you were trying to purchase a home far away from your current workplace, an underwriter might ask for a letter of explanation, wondering if you are taking a new job or planning to telecommute.

The kind of things that raise flags and cause underwriters to draw their pens and ink a request for a letter of explanation are anything that calls your ability to repay the loan into question. Things like sudden influxes of cash and gaps in employment can raise questions about whether there are other loans in the picture and if the income used to qualify for the loan will remain in place for the foreseeable future.

“It could be as simple as somebody had a child, and they left the workplace for a period of time,” Banfield told the WSJ.

“What the underwriter is trying to get at is the stability and continuity of the income they’re using to qualify the client to ensure that they can actually afford the payments.”

So what should you do if your underwriter wants to be pen pals? WSJ offers three tips for borrowers who need to write a letter of explanation:

  1. Don’t panic: These letters are common. Just because you need to fill one out doesn’t mean your dreams of homeownership are over and done. Answering these letters can often lead to getting your application approved.
     
  2. Address the issue: Be concise, date, sign and be accurate in addressing the underwriter’s concern.
     
  3. Know what they can and can’t ask: Lenders can ask for explanations regarding the application, but by law they cannot ask about medical information, gender, age, religious or racial information. Using this kind of information to influence the application approval is prohibited bias.

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