Clearing Credit Explanation Letter Conditions in Underwriting
Underwriters require explanation letters for derogatory credit items — late payments, collections, charge-offs, and foreclosures. Letters must be factual a
What Is This Condition?
- A credit explanation condition requires the borrower to explain in writing the circumstances behind each derogatory credit item that appears on the tri-merge credit report.
A credit explanation condition requires the borrower to explain in writing the circumstances behind each derogatory credit item that appears on the tri-merge credit report.
How to Clear This Condition
- 01Identify each derogatory item
- 02Draft LOE for each
- 03Borrower reviews and signs
- 04Attach supporting documentation
- 05Submit as package with file
Documents Required to Clear This Condition
- Signed LOE for each derogatory item (one per incident or grouping)
- Medical documentation for medical collections
- Bankruptcy discharge papers if applicable
- Proof of payment or agreement for collections being resolved
- Identity theft police report and resolution if disputing items
How CTC Handles This Condition
CTC reviews every credit report at intake and pre-drafts LOE templates for borrowers to review and sign. This prevents 'LOE on demand' conditions that slow down underwriting.
Frequently Asked Questions
What makes a good credit explanation letter?
Brief (1–3 paragraphs), factual, explains what happened, why, and what changed. Never blame the creditor. Never deny the debt. Acknowledge, explain, and move forward.
Do I need a separate letter for each late payment?
Generally yes for each incident or account. Multiple lates on the same account during the same period can be grouped in one letter. CTC prepares the LOE package and presents to borrower for signature.
How far back do I need to explain derogatory items?
FHA: 2 years of lates typically require explanation. Conventional: AUS determines. Bankruptcy: entire lookback period (4–7 years depending on type). Collections: all open collections, regardless of age.