Letter Of Explanation: Tips On Writing Letter Of Explanation To Underwriter

If you have been through a mortgage application process at one time or another, you are probably familiar with letter of explanation that mortgage underwriters requests.  Letter of explanation, often referred to LOX or LOE, is normally requested on both purchase mortgage loan applications as well as refinance mortgage loan applications from the mortgage loan underwriter when there are issues with items pertaining to late payments, bankruptcies, foreclosures, multiple credit inquiries, job gaps, unpaid collections, judgments, tax liens, charge offs, and other arbitrary items that is not obvious and can be ambigous.  Letter of explanations are one of the first items that is requested to explain extenuating circumstances on mortgage loan programs such as the FHA Back to Work Extenuating Circumstances due to an economic event pertaining to the borrower’s unemployment or underemployment that has affected his or her household income for the past six months or more before initiating the bankruptcy or foreclosure.

Writing A Letter Of Explanation: LOX

When you are requested to write a letter of explanation by the mortgage underwriter, you mortgage loan originator will coach you on how to write it so it explains the circumstances that is requested and is worded correctly.  The borrower should address the circumstances surrounding the situation and the reason why it happened and what the borrower did to solve the situation.  If a situation was a bankruptcy or foreclosure, explain the extenuating circumstances leading to the bankruptcy and/or foreclosure such as unemployment, divorce, death in the family, medical issues, or loss of business.   Then explain how they have recovered and what they did to re-establish credit.   Letter of explanation is required for every single credit inquiry within the past three to six months.  Most of the time, a simple statement like applying for a mortgage is sufficient or for credit card inquiries, a statement like shopping for better credit card interest rates are sufficient.

Letter Of Explanation On Owner Occupant Homes

If you are currently living in an owner occupied home but intend on upgrading or down sizing, a detailed letter of explanation will be required.  Why are you buying a second home and what are your intentions?  What do you intend after you purchase the larger home with the home you are moving out of your current owner occupied home?  Answers like these will be sufficient:  We intend on listing and selling our current owner occupied home after we move.  The reason we are moving from our current owner occupant home is because it is only 800 square feet and it is too small for our family of 5.  Our new purchase will be used as an owner occupant residence and it is 2,000 square feet, much larger than the 800 square feet home.  These statements for your letter of explanation will clearly make sense to the mortgage underwriter.

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