Letter of Explanation.....Your Key To VA Home Loan Approval

Table of Contents

• Key Takeaways
• Introduction
• Why a Letter of Explanation Matters
• Understanding Manual Underwriting
• Extenuating Circumstances: What They Are and How They Help
• Be Honest and Transparent
• How to Format Your Letter of Explanation
• Get Professional Help and Review
• Writing Tips: Clarity, Spelling, and Grammar
• The Structure of a Successful Letter of Explanation
• Conclusion
• Frequently Asked Questions (FAQ)

Key Takeaways

• A well-crafted Letter of Explanation (LOE) is crucial for veterans with lower credit scores aiming to secure a VA home loan.
• Manual underwriting often requires a LOE to provide context beyond credit scores, allowing veterans to tell their side of the story.
• Extenuating circumstances such as medical issues or layoffs can justify late payments and improve approval chances.
• Transparency is key: never hide financial issues; honesty builds trust with underwriters.
• Using a resume-style format for the LOE with a clear beginning, middle, and happy ending helps underwriters understand your situation.
• Getting your LOE reviewed by your loan officer or lending professionals increases the likelihood of approval.
• Proper spelling, grammar, and clarity enhance the professionalism and readability of your LOE.
• The VA wants to see that any past financial hardships have been resolved or are on a clear path to resolution.

Introduction

If you're a veteran looking to secure a VA home loan but have a lower credit score, understanding the importance of a Letter of Explanation (LOE) could be the difference between approval and denial. As a loan officer specializing in VA home loans, I’ve seen firsthand how this document can make or break your application. The VA loan program is designed with flexibility in mind, but lenders need to hear your story clearly and honestly. This article will walk you through everything you need to know about crafting a compelling Letter of Explanation that can help you get approved, even with credit challenges.

Why a Letter of Explanation Matters

Many VA loan applications, especially those undergoing manual underwriting or involving applicants with lower credit scores, will require a Letter of Explanation. But why is this letter so important? Simply put, credit scores don’t tell the whole story. They give a snapshot of your credit behavior but don’t explain the circumstances behind late payments, missed bills, or other credit blemishes.

The LOE is your opportunity to provide context and clarity about your financial history. It allows you to explain the "why" behind your credit challenges and highlight positive factors that might not appear on your credit report.

Understanding Manual Underwriting

There are two main types of underwriting for VA loans: automated and manual. Automated underwriting uses software to quickly determine loan approval based on set criteria. However, if the software cannot make a clear approval decision, the loan must go through manual underwriting.

Manual underwriting involves an underwriter reviewing your credit report and financial documents personally to assess your credit risk. This process is more flexible but also requires more detailed documentation—like a thorough Letter of Explanation.

Typically, underwriters look for no installment loan late payments for at least one year and at least two years with no late rent payments, although these are not strict VA requirements but common guidelines. If your loan is manually underwritten, providing a strong LOE is essential.

Extenuating Circumstances: What They Are and How They Help

The VA recognizes that sometimes, financial hardships are caused by extenuating circumstances. These are specific situations beyond your control that led to late payments or credit issues. If you can tie your credit difficulties to one of these allowable extenuating circumstances, your chances of loan approval increase significantly.

Common extenuating circumstances include:

• Medical emergencies or significant health issues
• Job layoffs or reduction in income
• Inability to sell a previous residence

It’s crucial to document these situations clearly in your LOE, explaining how they affected your credit and how the situation has since improved or been resolved.

Be Honest and Transparent

One of the most important tips when writing your Letter of Explanation is to never try to hide any financial issues. Underwriters will discover discrepancies during their review, and failing to disclose or explain problems upfront can lead to loan denial.

For example, I once had a borrower who forgot to mention a $45,000 tax lien. When we found out during underwriting, the loan was denied, wasting time and money for everyone involved. Being upfront about your financial situation allows your loan officer and underwriter to work with you to find solutions.

How to Format Your Letter of Explanation

From experience, I recommend using a resume-style format for your LOE. This means starting with a concise summary of why your credit isn’t perfect and then highlighting positive factors that strengthen your case. This approach makes it easier for underwriters to quickly grasp your situation.

For example, I worked with a borrower involved in a lawsuit related to contaminated water at Fort Bragg. She was expecting a six-figure settlement soon after closing, which wasn’t visible on her credit report but was a strong positive. Including this information helped balance out her credit negatives and led to a successful loan approval.

Get Professional Help and Review

Writing a strong LOE can be tricky, so always ask your loan officer to review your letter before submitting it. I offer this service as a courtesy because I know how critical a clear, well-written LOE is to your approval.

In some cases, I even have lending representatives review the letter to provide feedback on whether the file is workable or if we might be spinning our wheels. This avoids unnecessary delays and helps set realistic expectations.

Don’t hesitate to rewrite your LOE multiple times based on feedback. It’s better to spend the time perfecting your explanation upfront than face rejection later.

Writing Tips: Clarity, Spelling, and Grammar

Make sure your letter is easy to read and free of spelling or grammatical errors. If your LOE is hard to understand, underwriters may struggle to approve your loan.

Use tools like Grammarly or ask a friend or family member to proofread your letter. Make sure you organize your thoughts in clear paragraphs and put your situation in the best possible light.

The Structure of a Successful Letter of Explanation

A good LOE follows a storytelling format:

1. Things were going well: Start by establishing that your financial history was stable before the issue.
2. Something bad happened: Explain the extenuating circumstance that caused your credit problems.
3. Happy ending: Show how the situation has been resolved or is improving and outline your plan for future financial stability.

The VA wants to see that any past hardships are behind you. For instance, if you had cancer and are still undergoing treatment with ongoing financial strain, that might not be viewed as resolved. Instead, demonstrate that you have overcome or are actively overcoming the challenges.

Conclusion

In summary, a Letter of Explanation is a vital tool for veterans applying for VA home loans, especially if your credit score is less than perfect. It gives you the chance to explain your story, highlight positive factors, and show that any financial hardships have been addressed.

Remember to be honest, clear, and professional in your letter. Use a resume-style format and get your loan officer to review it thoroughly before submission. With the right LOE, you can increase your chances of getting approved for your dream home.

If you want to learn more about VA loans and how to navigate challenges like bad credit, be sure to explore resources and seek expert advice tailored to your unique situation.

Frequently Asked Questions (FAQ)

What is a Letter of Explanation (LOE) for a VA home loan?

A Letter of Explanation is a written statement from a loan applicant explaining any negative credit events, financial hardships, or unusual items on their credit report to provide context and clarity to the underwriter.

When is a Letter of Explanation required?

A LOE is typically required during manual underwriting or when there are credit issues such as late payments, liens, or other discrepancies that need explanation.

What should I include in my Letter of Explanation?

Include a brief summary of your credit situation, details about any extenuating circumstances that caused credit issues, how those issues have been resolved, and any positive information that supports your ability to repay the loan.

Can a Letter of Explanation improve my chances of VA loan approval?

Yes. A well-written LOE helps the underwriter understand your unique circumstances and can outweigh negative credit factors, increasing your likelihood of approval.

Should I get help writing my Letter of Explanation?

Absolutely. Having your loan officer or a lending professional review and help you refine your LOE can ensure it is clear, honest, and persuasive.

What are extenuating circumstances?

Extenuating circumstances are specific, allowable reasons for late payments or credit issues, such as medical emergencies, layoffs, or inability to sell a previous home, which the VA recognizes as valid explanations.

How important is honesty in the Letter of Explanation?

Honesty is critical. Hiding or failing to disclose financial issues can lead to loan denial and wasted time and money. Always be upfront about your situation.