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Writing Effective Credit Explanation Letters For FHA Mortgages

ByCarl Pruitt, writer
Dec 01, 2010
> Finance

3 Tips To Help Write A Better FHA Credit Explanation Letter

Loan officers who have lost their subprime golden goose are streaming into FHA loan origination. Their FHA loans are being turned down left and right by frustrated underwriters who can't believe such junk was put on their desk.

I'm about to place in your hands one of the most powerful tools there is to make sure you get your loans approved by FHA underwriters - the ability to excel at packaging a loan submission.

First things first. These tips are worthless without the proper foundation. Here it is: Make sure you have a borrower who really deserves a loan!

I know loan officers think everyone who wants a home deserves a loan as long as there is any way to squeeze them into the guidelines. Use common sense though. Make sure you really do believe someone will be able to make the payments before you go out of your way to get a mortgage approved for them.

Don't use the typical excuses so common during the mortgage boom years that you "aren't their parent" or "it's up to them to know whether they can make the payments" or "they'll just go on to someone else." The loan officers spouting those excuses are a prime reason that today you are having to fight tooth and nail to get loans approved that were once easy to close.

I'm not telling you all your customers must have pristine credit. I am saying you should not be helping deadbeats who haven't changed their habits, but want a home because "they are tired of throwing their money away on rent." Market yourself better and find the people who really did have an unexpected problem ruin their credit and who have learned their lesson. Remember FHA will cut you off from the program if you allow too many deadbeats through your filter anyway.

With that in mind, here are 3 power tips for writing an effective FHA credit explanation letter.

Tip 1

Don't write the credit letter. Let the borrower put it in their own words.

Probably not what you were expecting, but this is very important. A perfect letter put together completely by the loan officer can easily be detected by the underwriter and it will hold less weight when they see it. Allow the borrower's own words and own personality to make their way into the letter.

Tip 2

Don't leave the borrower completely on their own to write the letter.

Most loan officers still simply give the borrower a list of derogatory accounts and ask them to explain them. Don't do that. Give your borrower the proper guidance. Tell them what you expect from them.

Sadly, the average high school graduate today is functionally illiterate when it comes to the task of putting together such a letter. You are doing good people a disservice when you leave it all up to them. They could probably do a fine job of explaining it themselves if they were speaking directly to the underwriter and the underwriter could ask follow up questions. That doesn't happen anymore, so you must help them get it right from the beginning.

After the borrower explains the details of the situation which caused the credit problems and you have informed them that it is a crime to lie in this instance, have them write out exactly why the problem happened. Make sure they address and account for every single negative item on the credit report no matter how old or how insignificant it appears. Get them to explain in their own words why they feel this problem won't happen again and exactly what they have changed in their life to prevent it from doing so. Then have them explain why they feel the underwriter should reasonably expect them to be able to make the payments.

Don't skip any of those points. Once the borrower understands what is needed, let them put it in their own words.

Many loan officers tell their borrowers to keep their explanation letter short. Don't fall into this trap. Make sure the borrower explains everything in tedious detail to the point that anyone who picks up that loan file 10 years from now can easily understand why this borrower ended up being approved.

Here's a bonus tip: To satisfy the underwriters who don't like to read, always include your own cover letter in the submission file briefly summarizing the borrower's credit explanation and adding your own interpretation of which compensating factors the underwriter should consider.

When you structure the explanation part of your file this way, you are helping the underwriters make the decision without having to figure out on their own how they are going to justify it. This makes them more comfortable giving you an approval with fewer conditions.

Tip 3

Document the borrower's credit explanation and solution.

This is the extra punch even experienced loan officers often leave out, but it is the step which can take you above the level of the average loan officer into the category of miracle worker in the eyes of your borrower and their real estate agents.

Get some documentation to prove the borrower's credit explanation is true and that their explanation of how they have changed things is true. I know this involves extra work for you and for the borrower. It is worth it. If the borrower had a medical problem get something from the doctor, or include bills in the file. If the borrower was laid off, include a copy of their termination letter or evidence of receipt of unemployment benefits. If the borrower said their problems occurred because they had no medical insurance, prove they have it now. You get the idea.

Of course the borrowers often have difficulty finding this type documentation. That's why the average loan officer never gets it. Push them. It doesn't take much documentation to add considerable punch to your case that the loan should be approved.

Every day I talk to loan officers crying over turned down files that should have been approved. The common element in almost all of these cases is that the loan officer left it up to the underwriter to figure out why the loan should be approved. To avoid extra work which might be wasted, loan officers submit the loan hoping it will slip through without having to provide this documentation. Underwriters don't have time for this. When you put them in this position their answer will be to turn the loan down or approve it with approximately four thousand conditions of approval.

Times are difficult in the mortgage industry today. The mortgage originators who survive will be those who find a way to help the people other originators aren't helping. Becoming an expert on FHA loans can be the best way for a loan officer to do that. Use these tips to get more loans approved and get more referrals from your happy customers.

Mastering FHA guidelines can help you stand out from the average loan officer during troubled times. Sign up for free FHA updates and tips on how to get your troubled credit loan submissions approved at

Carl Pruitt
Carl Pruitt
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