I was in Chicago this past week giving a speech
to some mortgage industry professionals. We discussed the differences
in mortgage lending over the past ten years or so. One of lendings
old guidelines, that of Credit Explanations, had been mostly tossed
to the wayside in todays lending environment. When the speech
was over, I naturally gathered with some of the attendees and we
shared some of the credit explanations given to us over the past
decade and had a lot of fun doing so.
From an underwriting standpoint, a Credit Explanation is a statement
to an underwriter or lender explaining the cause and circumstance
of a negative credit item. Nowadays, one is either approved or theyre
not, forget the explanations. Theyre rarely used. For instance,
lets say that 2 years ago you had a 30-day late payment on
one of your credit card accounts. In the olden days, a lender would
want you to write a letter explaining why you were late and why
you wont be late in the future.
It didnt really matter how big, small or how old the account
in question was, the guidelines specifically stated that any derogatory
must have an explanation. And some of em were pretty goofy.
There was a guy buying a home in California. I recall that he was
an attorney and not only was the house he was buying big, so was
his down payment. It was a jumbo loan at the time and he bought
it for around $800,000 and put half down. His loan was for a fixed
rate jumbo mortgage of $400,000. He had excellent credit but he
also had a single late payment on an auto loan about two years earlier.
I called him and said that although I know this will be a pain,
he still needed to provide a written letter explaining the late
payment. He responded:
This letter is to explain why I was late on my car payment
of $285.55 in January the year before last. I understand that my
new home loan hinges on whether or not my explanation is acceptable
to your institution. Even though I have an excellent credit history
and Im putting half of my own money into the house I understand
that you need to know why I was late.
The answer is that I simply dont know. Ive gotten over
it, I hope you can to.
The guy got the loan.
Another couple had the unfortunate incident of having a bankruptcy
on their credit history. This definitely required some explanation,
and it was something that needed to be documented in the file.
Dear Underwriter- We had to file bankruptcy due to the fact
that we had more money going out than we had coming in. This naturally
made us behind on every bill all the time so instead of paying everyone
back we filed for bankruptcy. But that should not concern you because
we cant file for another seven years so your money should
be safe at least until then.
They didnt get the loan.
When another couple was asked for the reason for a bankruptcy,
they responded, The lawyer was having a sale on them.
Finally, a lady who had recently gotten out of college was buying
her first home. And as with many grads, she had more than a little
student debt and had fallen behind on several accounts. When asked
why she was late on her student loan accounts she said: When
I was a student, I took out these loans to pay for college. They
are deferred loans. That means I dont have to pay them back.
Actually, deferment means you have to pay them back, just not right
away. Something she apparently didnt understand.
Article continued at http://realtytimes.com/rtcpages/20030509_creditexplanation.htm