5b. Common credit challenges
5c. The importance of checking your credit
5d. Using letters of explanation
5e. How to build a good credit history
Read the full Chapter Five in one page
If a buyer has derogatory entries on their credit report, one of the best solutions for dealing with this problem is to write a letter of explanation to potential lenders. The letter of explanation may include explanations for soft credit inquiries and each derogatory entry that shows up on the credit report. When writing a letter of explanation, several components need to be included for every entry made.
- Start by citing the inquiry or entry, using the name of the creditor, the date and the amount involved.
- Offer an explanation of the problem. This is the time for honesty, even if it includes personal challenges. Buyers should include information about events that may have made meeting the obligation beyond their control, such as an illness, job loss or other personal problem. If a mistake was made, buyers should admit making a mistake and then go on to show what they have learned.
- For buyers that have worked to correct the credit problem, the steps taken should be described and providing documentation of these claims can substantiate the claim.
- This letter should be concluded with a paragraph that describes how the buyer has improved their financial habits. It should also inform the lender that the buyer intends to perform on the loan in a credit worthy manner.
- At the end of the letter, any documentation that may be used to prove financial situations or measures taken to fix credit problems should be included. For instance, divorce paperwork can be used to substantiate claims that a divorce has negatively affected credit. Buyers may use unemployment records or even a layoff notice to backup claims of job loss. The more documentation buyers can provide the more effective the letter of explanation will be.