Letter of explanation for a cash-out refinance (Template)

Letter of explanation for a cash-out refinance (Template)
Written by Publishing Team

Do you need a letter of explanation to refinance a cash withdrawal?

Lenders do not always require a letter of explanation to refinance a cash withdrawal. But it can help them better understand your needs and situation.

In some cases, it can make the difference between your application being rejected or accepted. So it may be helpful to include a letter whether or not you are asked to do so.

Here’s how to write a first-class cover letter for a cash withdrawal refinance to help get your loan approved.

Check eligibility for cash refinancing. Start here (January 16, 2022)

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What is a cash refinancing letter shown?

A cash refinancing letter of explanation does what its name suggests. It explains to the lender why you would like to withdraw some cash while refinancing.

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

But with cash refinancing, the letter will usually explain your plans for the money you get. This helps lenders understand why you want to cash out the home ownership. It could be a contributing factor to your approval of the refinancing.

Check eligibility for cash refinancing. Start here (January 16, 2022)

When is a letter of explanation required?

Some lenders always require a cover letter to refinance the cash withdrawal. Others will only ask for a letter if they are on the fence about agreeing to your reference.

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

Bad formatting, spelling, or grammar may reflect poorly on your app. So take your time and do the spelling checks and have someone you trust correct your writing for errors.

In addition, you can run a draft by your loan officer and ensure that this is what the lender wants to see before submitting the final copy.

cash disbursement refinancing letter sample

Below, we’ll explain exactly how to write a cover letter for a cash withdrawal refinancing and what to include.

But first, here’s a sample cover letter to show you what it should look like.

Click the image to open a PDF copy of the Cash Refinancing Explanation Letter Sample.

What to include in your letter of explanation

Here is a list of the contents to include in your letter of explanation, from top to bottom of the page:

  • Put the letter as you would any other letter, writing the full street address and phone number at the top
  • Date the letter on the date you write it
  • Enter the full name and address of the recipient (lender)
  • Add a salutation – it does not matter much how you greet the reader: “Dear Guarantor”, “Dear Sir or Madam”, “To whom it may concern.” choose you
  • Next comes a title in bold: “Re: Request to refinance the disbursement of cash for [your and any joint borrower’s full names]. Your reference: [the application reference number you’ve been given]”
  • You are now ready to write your text. Start by explaining the purpose of the letter. And in the next paragraph, go to providing the required information. Be sure to answer the question asked. But keep it short
  • Enter a log line – usually “Sincerely,”
  • Leave a gap for your signature(s)
  • Below that gap write your full name and the name of any co-borrower – with your email addresses and mobile phone numbers under it

Ensure that you and any co-borrower(s) sign the gaps you leave for those signatures.

Attach any supporting documents that you think will be useful. Remember that it is in your best interest to be strictly honest and transparent.

How to write a letter of explanation for cash withdrawal refinance

You can think of your letter as a marketing opportunity. You are trying to persuade the reader to “buy” the reasons for the borrowing. And your reader is a mortgage guarantor — someone who approves or rejects requests based on their assessment of your borrowing risk.

As with all good marketing communications, you’ll want to try to put yourself in the shoes of your readers. Then tell them what they want to hear.

So, for example, you might say that you want to invest in your home by remodeling your kitchen. You have three quotes for renewal costs and attach your preferred quote. If there is a difference between this amount and the amount you applied for to borrow, explain it.

If you borrow very little, say where the remaining money will come from. Or, if you’re borrowing more than a quote, say where the balance will go. You’ll probably want to add it to your emergency fund on rainy days.

It is probably not wise to say that you are using the money to buy a one-time luxury, such as paying for a vacation or buying an expensive car. But consolidating other high-interest debt is a good thing.

Finally, you must not lie. Because your message forms part of your application. Prosecutors can file a federal case for mortgage fraud.

When to write a cover letter to refinance a cash withdrawal

You will always have to provide a cover letter to refinance the cash withdrawal if requested by your lender. Your only alternative is to cancel the order and leave.

Chances are, you’ll get such a request if the mortgage lender sees your request as a limit and needs some reassurance about what you’re going to do with the money. But for some lenders, these are automatic for all applications.

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

You may want to include a letter explaining the cash disbursement even if you are not asked to do so. This may give your application a little extra boost, provided the reasons for withdrawing funds are financially wise.

Don’t volunteer if you are planning a vacation or purchasing other luxury products with your cashout money.

Or, if your plans make it unlikely that you will be able to keep up with your refinanced mortgage payments. For example, “I am planning to quit my stable job and need money for my business startup project” will set off alarm bells.

However, if you have a good story to tell that shows you are a responsible borrower with sound plans for your money, why not help the lender understand it?

Check eligibility for cash refinancing. Start here (January 16, 2022)

Why do underwriters request letters of explanation?

Do not panic when a cover letter is required to refinance a cash withdrawal. Sometimes, it’s automatically part of the lender’s process. But, even when this is not the case, you should consider it as an opportunity to strengthen your application.

Keep in mind that the underwriter would have already rejected your application if it had serious doubts. They just want some reassurance that you are a responsible borrower with well thought out plans.

For example, guarantors may apply for a letter of clarification if the debt-to-income ratio (DTI) is higher than they would like.

But, if you write to stress that some or all of the cash you withdraw will pay off some or all of your existing debts, you should greatly improve your chances. Because that would significantly reduce the DTI.

But this is just an example. Try to understand the reason behind the request for the letter of explanation you receive. And do your best to address it as directly as possible.

In fact, if you have a good relationship with your loan officer, you may find them a source of useful background information. Make it clear that you are not asking for insider help, but merely guidance that may help you clear anything that is bothering the underwriter.

Am I eligible for cash refinancing?

Lenders criteria apply when determining who is eligible for cash refinancing by lender and loan program.

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

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

Subscribers look at:

  1. Credit history and credit score – Usually 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. house of justice Most lenders require you to keep 20% of your home’s value as equity after cash refinancing. The more you keep, the better
  3. income and debt The more income you have at the end of each month, the more lenders will like you. A low debt-to-income ratio goes a long way in your refinancing application
  4. date of employment Your ability to hold a steady job in the past is a good indicator of your ability to make monthly payments consistently in the future

For more information about these loans, read: How does cash refinancing work: rules and requirements. In particular, this shows how much cash you can get with a cash back.

Find the best rate for cash withdrawal refinance

Several variables determine whether you are OK with the cash withdrawal refinance and the rate you will pay. These include the state of the mortgage market and the economy, the lender you choose, and your personal finances.

As with all mortgages, you’ll find the best possible cash-refinancing deal by getting multiple quotes (“loan estimates”) from multiple lenders. Compare these and choose the one with the lowest total cost of borrowing.

Shopping around the world will not only lower your prices but also increase the value of your money back when refinancing.

Check the new price (Jan 16, 2022)

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