What is a cash-out refinance letter of explanation? 

A letter of explanation for a cash-out refinance does what its name implies. It explains to the lender why you want to take some cash out while you’re refinancing.

When is a letter of explanation required?

Some lenders pretty much always ask for a letter of explanation on a cash-out refinance. Others will ask for a letter only if they’re on the fence about whether to approve your refi.

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

Poor formatting, spelling, or grammar can reflect poorly on your application. So take your time, run spellchecks and ask someone you trust to proofread your letter for mistakes.

In addition, you can run a draft by your loan officer and make sure it’s what the lender wants to see before you submit the final version.

Cash-out refinance letter of explanation template

Below, we’ll explain exactly how to write a letter of explanation for your cash-out refinance and what to include.

But first, here’s a sample letter of explanation to show you what yours should look like.

Click the image to open a PDF version of the cash-out refinance letter of explanation template.

What to include in your letter of explanation 

Here’s a checklist of the contents you should include in your letter of explanation, from the top of the page to the bottom:

• Lay out the letter as you would any other, with your full street address and phone number at the top
• Date the letter with the date on which you’re writing it
• Put in the recipient (the lender’s) name and full address
• Add a salutation — It doesn’t matter much how you greet your reader: “Dear underwriter,” “Dear Sir or Madam,” “To whom it may concern.” You choose
• Next comes a heading in bold: “Re: Cash-out refinance application for [your and any joint borrower’s full names]. Your ref: [the application reference number you’ve been given]”
• Now you’re ready to write your text. Begin by explaining the purpose of the letter. And, in the next paragraph, go on to provide the requested information. Be sure to answer the question posed. But keep it brief
• Insert a signoff line — Usually “Sincerely,”
• Leave a gap for your signature(s)
• Type below that gap your full name and that of any joint borrowers — with your email addresses and cellphone numbers underneath

Be sure that you and any joint borrower(s) sign in the gaps you left for those signatures.

And attach any supporting documents you think would be useful. Remember, it’s in your best interest to come across as scrupulously honest and transparent.

How to write a cash-out refinance letter of explanation

You can think of your letter as a marketing opportunity. You’re trying to get the reader to “buy” your reasons for borrowing. And your reader is a mortgage underwriter — the person who approves or declines applications based on their assessment of your borrowing risk.

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

So, for example, you might say you want to invest in your home by remodeling your kitchen. You’ve had three quotes for the renovation costs and are attaching your preferred one. If there’s a difference between that sum and the one you’ve applied to borrow, explain that.

If you’re borrowing too little, say where the rest of the money will come from. Or, if you’re borrowing more than the quote, say where the balance will go. Perhaps you want to add it to your rainy-day emergency fund.

It’s probably unwise to say that you’re using the money for a one-time luxury, like paying for a vacation or expensive car. But consolidating other high-interest debts is fine.

Finally, you mustn’t lie. Because your letter forms part of your application. And prosecutors can make a federal case out of mortgage fraud.

When to write a letter of explanation for your cash-out refinance 

You’ll always have to provide a letter of explanation for a cash-out refinance if your lender requests one. Your only alternative is to cancel the application and walk away.

Chances are, you’ll get such a request if the mortgage underwriter sees your application as borderline and needs some reassurance about what you’ll do with the money. But, for some lenders, these requests are automatic for all applications.

Should you write a lettter of explanation even if the lender doesn’t ask for it?

You might want to include a cash-out letter of explanation even if you haven’t been asked for one. This could give your application a little extra boost, provided the reasons for your cash out are financially prudent.

Don’t volunteer one if you’re planning a vacation or other luxury purchase with your cash-out funds.

Or, if your plans make it less likely that you’ll be able to keep up with the payments on your refinanced mortgage. For example, “I’m planning to quit my steady job and need the money for my startup business venture” will set off alarm bells.

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

Why do underwriters ask for letters of explanation? 

Don’t panic when you’re asked for a letter of explanation for a cash-out refinance. Sometimes, it’s an automatic part of a lender’s process. But, even when it isn’t, you should see it as an opportunity to strengthen your application.

Keep in mind, an underwriter would have already rejected your application if they had serious doubts. They just want some reassurance that you’re a responsible borrower with thought-through plans.

Do I qualify for a cash-out refinance? 

The criteria lenders apply when deciding who qualifies for a cash-out refinance vary by lender and loan program.