What is a comfort letter and why do you need one?
The mortgage process when purchasing a home can be tricky—there's a ton of paperwork to read through and sign, so much that your hand might just cramp up from the vast amounts of signatures required. But don't worry if your mortgage lender requests that you write them a "comfort" letter—it's just a statement clarifying your financials so they can get you to the closing table with minimized risk.
"We try to connect the dots using data, and we think that makes the application process more robust," Bill Banfield, executive vice president of Capital Markets for Quicken Loans in Detroit, told the Wall Street Journal in an interview. "But when you need a little help from the client to connect those dots, letters of explanation are a way to help an underwriter interpret something."
What do they want to clarify? It can be a number of things:
Is there a period of time in which you were not working recently? The bank may ask you about this lapse so they can ensure you are still a stable loan candidate and are financially comfortable with paying back the loan once you close on the home. You may have worked freelance during this time, in which case the bank may ask for proof of income.
Large Bank Deposits
Did you recently come into a large sum of money? If you deposited it into your bank account, your mortgage lender may ask you where that money came from and what you plan to use it for. There are strict rules about using gifted funds toward the purchase of a home, and your lender will want to confirm it's not a loan given to you by friends or family that you'll need to pay back.
New Job Status
Are you switching jobs in the middle of the loan application? If there's a change in income, this could add another layer of questioning. Your mortgage lender may want you to state how much you will be making at the new job, as anything less than your current income is going to change how much you can afford. They may also want to know where the job is located—if it's further away from where you live, will you be commuting or working remotely? The bank just wants to ensure you are a legitimately viable loan candidate.
These letters are a way for your mortgage lender to cover their bases. If you're completely open about your financial history when applying for the loan, you have nothing to worry about. So, don't panic, provide the information in a timely fashion and you should be good to go!