Need A Letter Explaining Derogatory Credit, Don't Panic!

letter explaining derogatory credit

If you to write a letter explaining derogatory credit, don't panic. This letter may be necessary even with a good credit score.

Having a good credit score means your finances are in good shape. The information on your credit reports is used to compute your credit score. The more positive information you have on your credit report, the better your credit score.

Lenders use credit scores to make crucial decisions like approving mortgages and advancing loans. Having negative information in your credit reports is never a good thing.

Derogatory marks on your credit score may pose significant challenges when trying to secure a mortgage. When you apply for a mortgage, lenders must review your credit report to check any negative history.

If they find any negative items on your credit reports, the lenders will require you to explain the reasons for derogatory credit through a letter. Letters explaining derogatory credit can increase your chances of securing a mortgage.

What Is A Letter Explaining Derogatory Credit?

After applying for a home loan, the mortgage company evaluates your creditworthiness to determine whether you qualify for a mortgage. Lenders use underwriters to review your financial documents to decide if you are the right candidate for a home loan.

When you have negative marks on your credit, you have derogatory credit. However, while this doesn't stop you from applying for a mortgage, you might be required to write a letter explaining derogatory credit marks and why you have negative items on your credit report. You can now explain in detail why your credit report has negative marks.

If asked to write a letter explaining derogatory credit, don't panic.

Do not assume you will be denied credit or that your mortgage application will not go through because of negative information on your credit report.

Lenders ask for a letter of explanation simply because they require more information regarding sudden changes or derogatory items on your credit report.

Being asked for a letter explaining derogatory credit could be a good sign. You can look at it as an opportunity to share information that could sway the lenders into approving your mortgage.

A letter explaining derogatory credit is designed to give the mortgage company a deeper understanding of your present financial situation and highlight any past circumstances that might have ruined your credit score. Explain what happened in your own words.

Situations Where You Might Need To Provide A Letter Of Explanation

man holding creditworthiness sign

Several scenarios might prompt a lender to request a letter explaining derogatory credit. Some of the circumstances are: 

1. Derogatory marks on your Credit Report

Your credit report's negative history is enough to prompt lenders to ask for a letter of explanation. Lenders check for red flags on your current financial situation and credit history. If they find anything that can raise concerns, they ask you to provide them with an explanation through a letter.

2. If The Borrower Is Self-employed

If you are self-employed, your income will vary from one month to another. Income from self-employment poses challenges to underwriters when they review your financial documents. If you are self-employed, you might be required to shed some light on your average monthly income.

3. If You Have Gaps In Your Employment History

A lender needs to have confidence in your employment. Having gaps in your employment history might send the wrong message to lenders, and lenders might conclude that you do not have a reliable and steady income to keep up with a mortgage. 

You might need to explain in writing and maybe a copy of a new job offer to gain back your lender's confidence in your employment.

4. If You Have A High Debt-To-Income Ratio

If your income cannot cover all your monthly expenses, you are more likely to lag in paying your home loan. If your debt-to-income ratio is over 50%, you will be required to write an explanation letter.

What's The Difference Between A Goodwill Letter And A Letter Explaining Derogatory Credit?

Do you want to remove an uncharacteristic blunder from your credit report? Maybe you made a late payment, or you changed addresses?

A goodwill letter requests the creditor that reported you to withdraw the derogatory items from your credit report.

If you have a good credit history except for maybe one blunder, you may be able to get rid of the negative account by writing a goodwill letter to your creditor. If you have a bad credit history, a goodwill letter might not help much.

On the other hand, a letter of explanation is sent to lenders explaining negative or derogatory marks on your bank statements and credit report or information that might make a loan underwriter pause.

How To Write A Letter Of Explanation For Derogatory Marks On Your Credit Report

You should type the letter, sign it, and include the current date. Letters of explanation should contain the borrower and the lender's details: name, street, town, state, and ZIP code. In the "RE" section, include your name and loan application number. Letters of explanation should be short and precise.

Letters should consist of all the information requested by the lender and present them in a manner that paints a clear picture of your situation at the time.

It is illegal to lie on a home loan application, and if any dishonesty is detected, the mortgage application will be denied.

My Letter Of Explanation Was Rejected. What's Next?

If a lender rejects your letter of explanation, do not give up just yet. Letters of explanation may be dismissed because some fail to clarify the lender's query. So please read the request carefully and make sure your reply answers and addresses any concerns your lender may have.

You can write another letter and attach documents that support your claim. If rewriting does not work, you can choose another lender and start the loan process over.

Can I Avoid Having To Write A Letter Of Explanation For Derogatory Credit?

Letter of explanation for derogatory credit

Yes, you can! Do not wait to write a letter to your lender explaining derogatory marks on your credit report. Instead, get real-time credit score monitoring and work towards dealing with derogatory accounts and raising your credit score with credit repair. Monitoring your credit now and addressing any problems will save you time and money later when you need a loan.

To fix your credit score, you need to identify the negative factors that might be ruining your credit score. First off, get copies of your credit reports from all three credit bureaus.

There might be errors in your credit reports. Dispute them with all credit bureaus. Next, pay down your debts and credit card balances.

Also, ensure you pay all bills on time and avoid applying for new credit until you are debt-free. Again, you can hire a reputable credit repair company to help you deal with derogatory marks on your credit report.

If your credit scores are on shaky grounds because of derogatory marks, but you hope to get a mortgage, you might have to write a letter explaining derogatory credit.

A letter of explanation could be your gateway to acquiring a new home. Alternatively, if you start taking steps to raise your credit score and work with the best credit repair company, your credit score will improve.

Together, you can make positive changes in your credit report and financial future. Besides, having good credit means you won't have to deal with the hassles of writing a letter of explanation. Don't let derogatory marks get in the way of living the life you want and deserve.

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