How To Write Letter Of Explanation To Mortgage Underwriters

This BLOG On How To Write Letter Of Explanation To Mortgage Underwriters Was UPDATED And PUBLISHED On May 4th, 2020

How To Write Letter Of Explanation To Mortgage Underwriters

By Gustan Cho

When home buyers apply for a mortgage with prior questionable items on the credit report, mortgage underwriters may need clarification. If underwriters need clarification on the items below, they need letter of explanations:

  • such as prior derogatory credit
  • bankruptcy
  • foreclosure
  • short sale
  • judgment
  • credit disputes
  • late payments
  • outstanding collections
  • credit inquiries
  • tax liens
  • judgments
  • charged-off accounts
  • other items that an underwriter may need clarification, letter of explanation to mortgage underwriters will need to be provided

Structure Of Letter Of Explanation To Mortgage Underwriters

Loan Officers should write a letter of explanation on behalf of borrowers or write them together.

Letter of explanation should be brief, concise, and to the point:

  • Lox to mortgage underwriters should not cover off topics
  • Should be focused on the item requested
  • If borrowers mention other questionable topics on the letter of explanation
  • It can open up another can of worms
  • Once a mortgage underwriter sees other information volunteered and it is questionable, then the mortgage underwriter cannot just ignore it
  • Underwriters cannot unsee something they saw
  • Underwriters may and often times will then ask for another letter of explanation on the subject matter volunteered by borrowers and mentioned

What Types Of letter Of Explanation To Mortgage Underwriters Are Often Requested?

What Types Of letter Of Explanation To Mortgage Underwriters Are Often Requested?

In the event, if the borrowers file needs clarification, the underwriter will request a letter of explanation.

  • For example, let’s take a case scenario
    • if a mortgage loan applicant has had a history of good credit
    • Then all of sudden a period of late payments on all of his or her payments
    • The underwriter will require a letter of explanation as to the event that caused the period of bad credit
  • Borrowers who filed bankruptcy, a letter of explanation will be required
  • The mortgage applicant does not have to write a dissertation
  • Simply a few paragraphs of the extenuating circumstances leading them to file bankruptcy
  • Some of the common acceptable letters of explanation can be that the reason for filing bankruptcy was due to the following:
    • loss of a job
    • loss of their business
    • Divorce
    • Medical
    • Death in the family

Cases Where LOX Is Required

  • Other situations where the letter of explanation to mortgage underwriters may be required is a prior housing event such as a prior foreclosure, deed in lieu of foreclosure, or short sale
  • The letter of explanation can simply state that the reason for the foreclosure, deed in lieu of foreclosure, or short sale was due to the following:
    • the fact that they had an adjustable-rate mortgage or balloon mortgage
    • when the adjustment period came up, the new payments were substantially higher than what they could afford
    • Lost job
    • Lost business
    • Death in family
    • Divorce
    • Home underwater where mortgage balance higher than the value
  • Reasons like this were very common prior to the 2008 real estate meltdown
  • Subprime mortgage lenders gave home buyers teaser introductory mortgage rates for a certain period of time
  • When the teaser rate period was over, the new adjusted mortgage payments were double, sometimes triple where homeowners could no longer afford the new housing payments
  • Never write a letter of explanation to mortgage underwriters that reason for foreclosure was to bail
    • Bail due to the fact that house had mortgage underwater
    • decided to just turn keys in and wait out the waiting period after foreclosure and purchase a new home
  • This letter of explanation to mortgage underwriters that homeowner could have afforded home but bailed
  • The mortgage loan originator will review and coach borrowers on what to write on the letter of explanation and review it prior to submitting

Attach Supporting Docs To LOX

What is Letter Of Explanation To Mortgage Underwriters With Documentations Attached Shows Strength

Borrowers with an extended period of bad credit but have since recovered and re-established themselves can qualify for a mortgage.

  • However, underwriters will request a letter of explanation by borrowers providing documentation with letter of explanation to mortgage underwriters

Documentations and supporting facts show strength and mortgage loan underwriter will rule in borrower’s favor.

  • For example, if the reason for having derogatory credit for six months was due because the borrower was involved in an automobile or motorcycle accident
  • Provide proof of hospital bill, accident report, or letter from the hospital
  • Provide this with letter of explanation to mortgage underwriters
  • This will prove that the period of derogatory credit was due to an extenuating circumstance
  • It will add strength to mortgage file
  • The underwriter will feel much more confident in favor of getting a mortgage loan approval

Mortgage Borrowers with any further questions on how to write a letter of explanation to mortgage underwriters feel free to contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at gcho@gustancho.com.


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Related> Sample Letter of Explanation

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