Has the bank asked you for an explanation letter? This is common if you’ve found yourself applying for a home loan with credit issues, or maybe you’ve moved address or accidentally forgot to pay for a phone bill. Either way, there are a few ways to work this out. You’ll need to be prepared with evidence and a good explanation.
In general, banks look for a letter to explain the circumstance for those who have missed payments on current debt, bankruptcy, defaults, or judgements against their credit file.
So to get you moving with this process, we’ve compiled some letters as templates for you to use when explaining your reason for defaulting and how you rectified it.
Table of Contents
Quick Summary
- Explanation letters are often required by banks for home loan applicants with credit issues
- Key components of an explanation letter: date, signature, full name/address, detailed explanation, supporting evidence, acknowledgment of seriousness
- Sample templates provided for common situations like defaults, business issues, shared bills, unemployment, divorce, moving overseas/house
- Tips for writing effective letters: take responsibility, describe rectification steps, explain future prevention plans
- Evidence is critical to support your explanation
- Hunter Galloway offers expert assistance with explanation letters and home loan applications
Understanding Explanation Letters for Home Loan Applications
When applying for a home loan in Australia, lenders scrutinise your credit history and financial background. If there are any issues or discrepancies in your credit report, the lender may request an explanation letter.
This document allows you to provide context and clarification about specific credit events or financial circumstances that may raise concerns during the loan application process.
Common reasons for needing an explanation letter include:
- Late payments or defaults on existing debts
- Bankruptcy or Part 9 Debt Agreements
- Judgments against your credit file
- Gaps in employment history
- Frequent changes of address
- Unusual spending patterns or large transactions
An effective explanation letter can significantly improve your chances of loan approval by demonstrating your understanding of past financial mistakes and your commitment to responsible borrowing in the future.
This guide will walk you through the process of crafting a compelling explanation letter, with templates and examples to help you address various scenarios.
Template for an explanation letter
Australian lenders have strict requirements for letters explaining any credit problems you may have.
Use the outline below to help make the process as smooth as possible.
Your letter should be:
- Dated.
- Signed.
- Contain your full name and address.
- Explain what happened in as much detail as possible.
- Provide any evidence that supports why you defaulted on the credit facility, including receipts, letters, insurance policies and contracts (only send copies so you can hold onto the originals).
- Include a sentence confirming that you understand how serious the credit problem is and intend never to get into that situation again.
Usually, an email or faxed copy is accepted. However, some will require your mortgage broker to have a copy of the original file.
Default explanation letter to the bank
1/1/2022
To Whom It May Concern:
Re: Default to XXX for $500
I can confirm that in May 2021, I purchased a mobile phone through Telstra. One week later, the phone malfunctioned, and I returned it to the store. I asked for the plan to be cancelled. However, the staff did not cancel the plan, and the bills continue to be sent to me for a phone that was not in use. This case was escalated, and Telstra lodged a default on my credit file.
I am currently pursuing this further with the Telecommunications Ombudsman. Evidence has been included for your reference. I am aware of the serious nature of a credit agreement and will ensure every effort is made to make payments on time for my home loan. Please do not hesitate to contact me on XXXX if you require further information.
Regards,
(SIGN)
John Doe
Chat with Hunter Galloway for further support about writing a letter to the bank.
To make a successful application, you need to adhere to the bank’s guidelines for the letters; otherwise, the bank could decline your loan.
Explanation letter for business issues
It’s not uncommon to have issues with your business, and the bank might pick this up as a part of the application process. It could even be as simple as explaining that a current directorship you have is for a hobby business or something that is a side business and that you aren’t reliant on that income.
My wife and I had a small business that was part of a larger franchise group. In 2020 the large franchise group went into liquidation, and as a result, we were forced out of business.
Due to the cost of setting up the business, we were left with numerous debts. However, we have now returned to our previous jobs and repaid the debts. This experience, unfortunately, has left defaults on our credit file.
Sharehouse bills explanation letter
Shared houses can be great. They allow you to split bills and expenses with everyone living there, but the downside is that you might leave someone responsible for a bill, and they forget to pay it. This means you get hit with an electricity provider default and could cause headaches when applying for a home loan.
In 2021 I was living in a share house with two other flatmates. The lease and utilities were under all of our names. Later that year, I moved out of the property, but I was unaware that I was still liable for the utility bills.
I tried to apply for a credit card and was knocked back due to a default on my credit file. Only then did I find out that my previous housemate had not paid the electricity bill.
Unemployment explanation letter
An unemployment explanation letter is less common than the others but could be used to explain to the bank a gap in your employment history and the reason for it. This is quite a common reason loans get declined by various banks.
I was living in a country town that heavily relied on the mining industry.
The local mine closed, which had disastrous effects on the entire town’s economy and caused me to lose my job.
I could not find work in the town for over 6 months, and despite my best efforts, a default was lodged on my credit file.
I have since moved to a major city, have stable employment and have paid my outstanding bills.
Divorce explanation letter
Again this is a less common explanation letter but could be required to explain why home loan or electricity bill repayments were missed even though you were still fully employed.
My wife and I divorced in early 2016, leaving me with the children. I moved back in with my parents until I could find somewhere for us to live. During this time, all of our bills were being sent to our previous address, and my ex-wife did not pay them.
Moved overseas explanation letter
Moving overseas is a common reason why people default on telephone and electricity bills, as they might forget to set up mail forwarding and never know they even owe the money!
Fortunately, you can use the letter template below to explain your situation and how the problem occurred.
In 2019 I moved to Europe for three years.
Prior to leaving, I instructed my credit card provider to mail my statements to my parents’ address. However, for some reason, the provider never changed my address, and they couldn’t contact me, so a “clear out” default was lodged on my file.
Upon my return home, I found out about the unpaid bill and got in contact with them to pay it immediately.
Moving house explanation letter
This is another unfortunate situation where you might have moved house, forgotten to get your mail forwarded and, consequently, fallen into default with your provider. Not to worry, fill out this letter, and we can look at your home loan options.
Due to renting, I moved house in 2016 and informed my internet and phone bill providers of this. For some reason, the transfer was not completed, and they continued sending bills to my previous address. After some time of the account being unpaid, they lodged a default on my credit file without notifying me.
Hunter Galloway’s tips for explanation letters
It’s important to follow the bank’s requirements closely, but alongside this, here are a few tips to help get your message across:
- If you were guilty: Take responsibility. Don’t blame anyone else or the creditor for your mistakes, as this can really reflect badly on your character.
- If you were innocent: If it was a mistake, describe what steps you took to rectify the situation, including all correspondence with relevant parties, in a clear and concise manner.
- Explain what steps you’ll take: Be clear that you don’t intend to get into a similar situation again and also how you plan to do that. It can work in favour of your application.
Good and bad reasons
Lenders will try and understand whether or not the problem was your fault. However, if it was your fault, don’t expect the lenders to be on your side and support you unless you can give them a strong reason as to why you’re not a high-risk customer.
Good reasons for default include illness, marriage breakdown, being overseas or a dispute with your utility provider.
Bad reasons for default include an unwillingness to pay, loss of job, bad money management and spite.
Evidence is everything
Without evidence to back up your story, you’ll find it very hard to win the lenders over. For divorcees – can you provide a letter from your solicitor? Or if you were travelling, have you got a copy of your visa? All of this evidence will help form your case and make it clear to the lender how you’re currently trying to resolve the situation.
Speak to Hunter Galloway about writing your credit history letter and home loan options today.
Frequently Asked Questions
What is an explanation letter for a home loan application?
An explanation letter is a document requested by lenders to clarify issues in a home loan application, such as credit problems, defaults, or gaps in employment history. It allows applicants to explain their circumstances and provide supporting evidence.
When might a bank ask for an explanation letter?
Banks typically request explanation letters when there are credit issues, missed payments, bankruptcies, defaults, judgments against credit files, or other concerning elements in a loan application that require clarification.
What should be included in an explanation letter?
An explanation letter should be dated, signed, include your full name and address, explain the situation in detail, provide supporting evidence, and include a statement acknowledging the seriousness of the issue and your commitment to avoiding similar situations in the future.
How should I format my explanation letter?
Your letter should be professional, concise, and follow a standard business letter format. Include the date, recipient’s address, a clear subject line, your explanation, and your signature at the bottom.
Can I email or fax my explanation letter?
Most lenders accept emailed or faxed copies of explanation letters. However, some may require your mortgage broker to have the original on file. Check with your lender or broker for specific requirements.
What types of evidence should I include with my explanation letter?
Include any relevant documentation that supports your explanation, such as receipts, letters, insurance policies, contracts, or correspondence related to the issue. Only send copies and keep the originals for your records.
How do I explain a default on my credit file?
Clearly state the circumstances that led to the default, any steps you took to rectify the situation, and how you’ve ensured it won’t happen again. Be honest and take responsibility if the default was your fault.
Can I get a home loan if I have a default on my credit file?
Yes, it’s possible to get a home loan with a default on your credit file, but you’ll need to provide a satisfactory explanation and may face stricter lending criteria or higher interest rates.
How do I explain a gap in my employment history?
Provide details about the reason for the gap, such as relocation, further education, or caring for family members. Explain how you’ve since stabilized your employment situation.
What should I include in an explanation letter for business issues?
Explain the nature of the business issue, its impact on your finances, and how you’ve resolved the situation. If it’s a side business or hobby, clarify that it’s not your primary source of income.
How do I explain defaults caused by living in a sharehouse?
Detail the living arrangement, explain how the default occurred (e.g., miscommunication about bill responsibilities), and describe how you’ve resolved the issue and taken steps to prevent it from happening again.
What if my default was caused by a divorce or separation?
Explain the circumstances of the separation, how it affected your finances, and any steps you’ve taken to resolve outstanding debts and stabilize your financial situation.
How do I explain defaults that occurred while I was overseas?
Detail your travel dates, explain why bills weren’t paid (e.g., mail forwarding issues), and describe how you addressed the defaults upon your return.
What are some tips for writing an effective explanation letter?
Be honest, take responsibility if appropriate, provide clear details, include supporting evidence, and explain steps you’ve taken to prevent similar issues in the future. Keep the tone professional and concise.
Are there “good” and “bad” reasons for defaults in the eyes of lenders?
Lenders generally view unavoidable circumstances (illness, divorce, disputes with service providers) more favorably than reasons that suggest poor financial management (unwillingness to pay, job loss without attempts to find new work).
How important is providing evidence with my explanation letter?
Evidence is crucial in supporting your explanation and demonstrating to lenders that you’re taking steps to resolve the issue. Without evidence, it can be challenging to convince lenders of your case.
Can a mortgage broker help me write my explanation letter?
Yes, experienced mortgage brokers can provide guidance on crafting an effective explanation letter and ensure it meets the lender’s requirements.
Will an explanation letter guarantee my home loan approval?
While a well-written explanation letter can improve your chances, it doesn’t guarantee approval. Lenders will consider your entire application, including your current financial situation and credit history.
How long should my explanation letter be?
Keep your letter concise and to the point, typically no longer than one page. Focus on providing clear, relevant information without unnecessary details.
Can I use a template for my explanation letter?
While templates can be helpful as a guide, it’s important to personalise your letter to your specific situation. Lenders can often recognise generic templates, which may be less effective than a personalised explanation.
Speak to our team of experts today
We are experts in getting home loans approved and work with several banks that specialise in helping first-home buyers.
If you would like to chat about buying a home and need finance, speak with one of our experienced mortgage brokers to walk through the next steps with you.
At Hunter Galloway, we help home buyers get ahead in this competitive market, and we give you the actual strategies that have helped other home buyers like you secure a property when there have been 5 other offers on the table! Enquire online or give us a call at 1300 088 065.
Start again
