Letter of explanation for a cash-out refinancing (template)

Do you need a letter of explanation for a cash-out refinancing?

A letter of explanation for a cash-out refinancing is not always required from lenders. But it can help them better understand your needs and situation.

In some cases, this can even mean the difference between rejecting or accepting your application. So it can be helpful to include a letter whether or not they ask you.

Here’s how to write a world-class withdrawal refinancing statement letter to approve your loan.

Check your eligibility to withdraw the refinancing. Start here (15.11.2021)

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What is a letter of explanation for a withdrawal refinancing?

A letter of explanation for a cash-out refinancing does what the name promises. It explains to the lender why you want to withdraw some money while refinancing.

There are many other types of statement letters that lenders could request. For example, they might ask you to explain a flaw in your credit report or why there is a void in your employment history.

However, for a refinance with payout, the letter will usually explain your plans for the money you withdraw. This will help your lenders understand why you want to pay off home equity. And it can be a factor in your refinancing approval.

Check your eligibility to withdraw the refinancing. Start here (15.11.2021)

When is a letter of explanation required?

Some lenders almost always require a letter of explanation for a refinancing from the payout. Others will only ask for a letter if they are unsure whether to approve your refi.

In this case, the letter of explanation is your chance to tip the balance in your favor. So take it seriously.

Poor formatting, spelling, or grammar can adversely affect your application. So take the time to do a spell check and ask someone you trust to proofread your letter for mistakes.

Additionally, you can have a draft from your loan officer and make sure this is what the lender wants to see before submitting the final version.

Template for a letter of explanation for a disbursement refinancing

In the following, we explain exactly how to write a statement of explanation for your cash-out refinancing and what you need to include.

But first, here is a sample letter and explanation to show you what yours should look like.

Click the image to open a PDF version of the Withdrawal Refinancing Statement Letter template.

What to include in your statement letter

Here is a checklist of the items to include in your statement, from top to bottom:

• Lay out the letter like any other, with your full address and phone number at the top
• Date the letter with the date you write it
• Enter the name of the recipient (the lender) and full address
• Add a salutation – It doesn’t matter how you greet your reader: “Dear insurer”, “Dear Sir or Madam”, “Whom it concerns.” You choose
• Next up is a bold headline: “Re: Cash-out refinancing application for [your and any joint borrower’s full names]. Your reference: [the application reference number you’ve been given]”
• Now you can write your text. Start by explaining the purpose of the letter. In the next paragraph, fill in the requested information. Be sure to answer the question asked. But keep it short
• Include a signoff line – usually “Sincerely”,
• Leave a gap for your signature (s)
• Below this gap, enter your full name and that of all joint borrowers – with your email addresses and mobile phone numbers below

Make sure you and any common borrowers sign the gaps you left for these signatures.

And include any supporting evidence you think will be useful. Remember, it is in your best interest to act as conscientiously honest and transparent.

How do I write a letter of explanation for a withdrawal refinancing?

You can think of your letter as a marketing opportunity. They are trying to get the reader to “buy” your borrowing reasons. And your reader is a mortgage insurer – the person who approves or denies applications based on their assessment of your credit risk.

As with any good marketing communication, you want to try to put yourself in the shoes of the readers. And then tell them what they want to hear.

For example, you could say that you want to invest in your home by remodeling your kitchen. You have received three renovation estimates and are adding your preferred one. If there is any difference between that amount and the amount you requested, explain it.

If you borrow too little, tell where the rest of the money is coming from. Or, if you’re borrowing more than the offer, tell where you want the credit to go. You may want to add it to your rainy day emergency fund.

It is probably unwise to say that you are using the money on a one-off luxury, such as a vacation or an expensive car. But consolidating other high-yield debt is fine.

After all, you mustn’t lie. Because your cover letter is part of your application. And prosecutors can sue federal mortgage fraud.

When to write a letter of explanation for your withdrawal refinancing

You must always provide a cash-out refinancing statement letter if requested by your lender. Your only alternative is to cancel the application and walk away.

Chances are, if the mortgage insurer considers your application to be borderline and needs confirmation of what you will do with the money, you will receive such a request. However, some lenders make these requests automatically for all applications.

Should you write a statement even if the lender doesn’t ask for it?

You may want to enclose a letter of explanation regarding the withdrawal, even if you have not been asked for it. This could give your application a little extra boost, provided the reasons for your withdrawal are financially sound.

Do not volunteer when planning a vacation or other luxury purchase with your Withdrawal Balance.

Or if your plans make it less likely that you will be able to keep up with your refinanced mortgage payments. For example, “I plan to quit my permanent job and need the money for my startup company” sets the alarm bells ringing.

However, if you have a good story to tell that shows that you are a responsible borrower with solid plans for your cash, then why not help your lender understand?

Check your eligibility to withdraw the refinancing. Start here (15.11.2021)

Why do underwriters require letters of explanation?

Do not panic if asked for a statement of explanation for a withdrawal refinancing. Sometimes it is an automatic part of a lender’s process. But even if it doesn’t, you should see it as an opportunity to bolster your application.

Remember, an underwriter would have already rejected your application if they had serious doubts. They just want the reassurance that you are a responsible borrower with well thought out plans.

For example, underwriters can request a letter of explanation if your debt-to-income ratio (DTI) is higher than desired.

However, if you confirm in writing that some or all of the cash you withdraw will pay off some or all of your existing debt, you should improve your chances significantly. Because that would significantly reduce your DTI.

But that’s just an example. Try to understand the reason for a letter of explanation request that you receive. And do your best to address it as directly as possible.

If you have a good relationship with your loan officer, you can find them as a source of useful background information. Make it clear that you are not asking for internal help, just a Taurus who could help you clear up anything bothering the underwriter.

Am I eligible for a cash-out refinancing?

The criteria lenders use in deciding who is eligible for cash-out refinancing vary by lender and loan program.

All lenders consider cash-out refinancing to be slightly riskier than non-cash-out refinancing. So you should expect a slightly higher mortgage rate: often 0.125% to 0.5% higher.

Overall, lenders offer the best deals to those they consider to be the least risky borrowers.

Underwriters look to your:

1. Credit history and creditworthiness – Typically a minimum FICO score of 620 or higher is required. The higher your score, the better. This shows that you are not only able but also willing to make your payments on time
2. Home equity – Most lenders require you to keep 20% of the value of your home as equity after a withdrawal refinance. The more you keep the better
3. Income and Debt – The more disposable income you have at the end of each month, the more lenders you will like. A low debt-to-income ratio will help with your refinancing application
4. Employment history – Your ability to keep a steady job in the past is a good indicator that you will be able to make regular monthly payments in the future

For more information about these loans, please see: How a Cash Out Refinance Works: Rules and Requirements. This particularly explains the amount of cash you can get with a cash out refi.

Find your best refinance rate for withdrawals

Many variables determine whether you are eligible for a cash-out refinance and what the interest rate you have to pay. This includes the state of the mortgage market and the economy, the lender you choose, and your personal finances.

As with all mortgages, you can find the best possible cash-out refinancing deal by obtaining multiple loan estimates from multiple lenders. Compare these and choose the one with the lowest total borrowing cost.

Shopping not only lowers your rate, but also maximizes the value of your cashback as you refinance.

Confirm your new plan (November 15, 2021)