The purpose of a letter of explanation of a bankruptcy is to explain to a potential lender the extenuating circumstances for an unfavorable credit history. These can include loss of a job, medical problems, family member deaths and other circumstances that are unlikely to reoccur. A combination of these credible excuses sometimes help reduce the waiting period for obtaining a new mortgage after bankruptcy or foreclosure, according to Innman News.
With the Federal Housing Administration, the normal waiting period for obtaining a mortgage after a Chapter 7 bankruptcy is five years. According to Innman News, a well-written letter of explanation detailing the extenuating circumstances and the individual's efforts to fix the problem that lead to the bankruptcy filing has the potential to reduce the waiting period to two years. Because lenders sometimes impose stricter limits than the federal agencies, borrowers have the burden of proof that they are worth the financial institution risking losing FHA funding due to too many foreclosures.
In the period between filing for bankruptcy and qualifying for a new mortgage, families often find themselves looking at rental properties for a place to live. The bankruptcy makes finding rentals difficult too. However, a similar letter addressed to property management companies increases the chances to get a rental property, according to Myvesta Foundation.