When applying for a home loan, banks may require you to provide an explanation letter to clarify a credit issue in the past.
If you have been required to send one and don’t know where to start, we brought together default explanation letter templates to get you started.
Why do banks need a letter about my credit history?
Not all lenders will reject applicants outright because of a credit issue. Some will require an explanation letter to hear your side and assess whether you currently can take out a new loan.
That said, you need a strong letter (and accurate evidence) to back up your claim.
Typically, banks will require you to submit a letter to explain the following:
- Loan defaults, bankruptcy, court writs, and judgments are reflected in your credit file.
- Missed debt repayments, especially for outstanding loans
You can use the letter templates below and customise them to explain your reasons for the default and go through the steps you took to address the situation.
Default explanation letter template
{Date}
To Whom It May Concern:
Re: {Loan Default or Credit Issue to explain}
I hereby confirm that I had purchased a smartphone with ABC Telecom in February 2020. A week after using the device, it started malfunctioning, so I had to return it to the store and ask them to cancel my mobile phone plan.
Unfortunately, the staff at the store did not cancel my plan, so I was still being sent bills for a phone I wasn’t using anymore.
This escalated to a formal dispute with ABC Telecom since I refused to pay the bills, at which point ABC lodged a default on my credit file.
I am currently pursuing this further with the Telecommunications Ombudsman. I’ve included evidence of this statement such as my correspondence with ABC and the Telecommunications Ombudsman for your reference.
I completely understand the serious nature of a loan agreement and make every effort to ensure regular monthly repayments on my home loan.
Should you need further information, please do not hesitate to contact me on {Contact Information}.
Warm regards,
{Sign}
{Name}
Feel free to continue reading below on other loan default letters to see if there’s a template for your situation.
If you want to know more and cannot find a useful template, talk to us at 1300 030 388 or enquire now and we’ll let you know how we can help.
Other types of loan default explanation letters
There are virtually endless variations of a standard loan default letter.
No two borrowers and home loans are the same, and there are several reasons why you encountered problems with your credit history.
You may use or customise the most common ones to fit your situation.
1. Shared bills with a flatmate after moving out for a long time
I rented an apartment with a flatmate at my previous address and had to split the lease and utilities between our names.
Eventually, I had to move out of the property, but I was unaware that the bills weren’t updated and that I was still liable for the utility bills.
When I recently applied for a credit card, I was rejected because of a recent default on my credit file. It was only then that my flatmate didn’t pay the bills.
2. A divorce
My partner and I divorced in late 2017.
I then left with the children and temporarily moved in with my parents until I could find a new place.
Eventually, I learned that all my utility bills were still being sent to my old address and my ex-spouse wasn’t paying them.
3. Long-term overseas stay
I moved to the UK for two years for a work-related training opportunity.
Before leaving, I went to my bank and informed my credit card provider of my departure. I asked them to mail my bills and credit statements to my parents’ address.
However, the request to change my billing address wasn’t lodged. Since the bank couldn’t reach out to me, they issued a clearout default on my credit file.
When I returned after two years, I learned about the unpaid bill. I immediately contacted my bank and paid the outstanding credit balance.
4. Change of address/residence
In late 2016, I moved to a new address and contacted my internet provider to update my contact details and connect my internet as soon as I moved.
Despite having my network connected, they were still sending my internet bills to my previous address. As a result, the account was unpaid for a few months until they lodged a default without notifying me.
5. Business/Start-up failure
My partner and I had a small family business that was part of a large franchise group in 2010.
Eventually, the head franchise group went into liquidation and my family was forced out of business. The upfront cost of setting up the business in its location left us with steep and unpaid debts.
Currently, we have since returned to our jobs and have repaid the debts. However, the experience left a loan default record on our credit file.
6. Pregnancy/new baby
I became pregnant in late 2010 and had to get off work for over 6 months.
My partner and I separated just before I found out about the pregnancy. Without financial support during those months, a default was lodged in my credit file.
I have since returned to work and have settled all my outstanding debts.
7. Pay date conflict
My wage’s pay date falls every 15th of the month. However, my home loan is due on the 12th of the month.
As a result, almost every home loan repayments was delayed by a few days, sometimes even a week, if my wage was pushed back.
I have settled that home loan and now intend to set up my new home loan payment date to fall after the 15th to prevent this issue from happening again.
Note that these templates are only created for common situations. Tons of possible financial situations may push your lender to request an explanation letter.
Suppose your credit history and financial situation don’t fall in the above examples. Talk to us at 1300 030 388 or enquire now and our senior mortgage brokers will gladly assist you.
What banks look for in default explanation letters
Banks and non-bank lenders often have strict requirements to consider a credit default explanation letter valid, genuine, and acceptable.
Your explanation letter should contain the following:
- The explanation letter must be dated and signed
- Must contain your complete address and full name
- Must explain the credit record in question in as much detail as possible
- Provide all evidence supporting your explanation, including receipts, insurance policies, copies of contracts, and letters
- Include a sentence that you confirms you understand the severity of the credit problem and intend to prevent that situation from happening again
Note that many lenders will accept a faxed copy. However, some require your mortgage broker to keep the original on file.
Proven tips for a strong default explanation letter
Your bank or lender may have particular requirements for default explanation letters. Nevertheless, here are golden tips you can keep in mind:
- Take full responsibility: Blaming your creditor for mistakes that you’ve committed speaks a lot about your character, which could compromise your loan application.
- Explain the actions you took to rectify the situation: If you were innocent and the credit default was filed by mistake, explain what you did to fix the situation, including all correspondence with concerned parties.
- How will you prevent it from happening again? Declare firmly that you don’t want to go through the same situation and explain what steps you’ll take to prevent it from happening again.
Being firm and clear in your explanation can work wonders in your loan application. Talk to our senior mortgage brokers at 1300 030 388 or enquire now to know more about how you can lobby a strong explanation letter.
Your lender will determine what caused the default
When our lender sees that you’ve had a previous loan default, they’ll weigh if the credit problem was completely your fault or due to circumstances outside your control.
If they find out that it was your fault, then you should not easily expect your lender to favour your loan application unless you have a strong guarantee that you’re not a high-risk borrower.
Valid and acceptable reasons for a loan default include:
- Long-term or severe illness
- Divorce
- Staying overseas
- Having a dispute with your utility provider
Bad reasons include:
- Unwillingness to pay
- Loss of job or long-term unemployment
- Poor financial management and spite
Provide evidence whenever possible
Credit officers working for major banks and lenders have seen and heard it all. From a poorly stitched excuse for a bad credit history to a very complex story with no evidence to back it up.
In other words, lenders are unlikely to consider your explanation and approve your loan application without strong evidence to support your letter.
Different situations warrant a unique set of evidence. A divorce may require a letter from your solicitor, while an overseas stay may warrant a copy of your visa.
With strong evidence and a well-written explanation, our senior mortgage brokers can lobby your loan application and get it approved by favourable lenders.
Do you need help with your home loan?
At Mortgage Pros, our senior mortgage brokers have worked with major banks in senior banking positions, so we know what they want and look for in loan applications. We’ll take you through 40+ options from our panel of lenders and recommend loans that give you the most value for your needs.
Talk to us at 1300 030 388 and enquire now to get started.
