How To Write Letter Of Explanation To Underwriters

This Article Is About How To Write Letter Of Explanation To Underwriters

Writing letter of explanation to underwriters to underwriters is part of the mortgage approval process.

Mortgage underwriters will require letter of explanation from mortgage loan applicants for derogatory items that is reported on the mortgage loan applicant’s credit report such as the following:

  • prior bankruptcy
  • foreclosure
  • deed in lieu of foreclosure
  • charge offs
  • collection accounts
  • late payments
  • irregular items such as large and irregular deposits
  • gaps in employment
  • part time job
  • bonus income
  • declining income
  • other out of the norm situations

Reason For Letter Of Explanation To Underwriters

Letter Of Explanation To Underwriters

Mortgage Underwriters needs to do cross check on every borrowers file they underwrite:

  • Letter of explanation to underwriters is required so it explains mortgage lending risks
  • Mortgage underwriters normally want documentation attached to the letter of explanation

For example, a letter of explanation may be required if borrowers had the following:

  • a substantial low income one year from the previous year
  • had a late payment history in past 12 months
  • if the late payment was due to a medical injury it needs to be explained
  • mortgage loan applicant was out of work and could not make the minimum payments then it needs to be addressed
  • letter of explanation stating that the borrower was injured along with a note from a medical doctor and receipts of his or her medical and/or hospital bills will provide a strong case for extenuating circumstances
  • This will prove that this was a one time event

However, borrowers with history of late payments throughout the years without solid extenuating circumstances, LOX stating they forget to pay will not go towards the applicant’s favor.

Reasons When Letter Of Explanation To Underwriters Are Required

There are many reasons why letter of explanation to underwriters are required.

  • Borrowers with prior bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale, letter of explanation to underwriters will be required
  • Those with period of layoff or gaps in employment will need to write letter of explanation to underwriters
  • Period of bad credit or late payments needs to be addressed
  • When writing LOX on periods of bad credit or late payments, borrowers need to write a simple letter outlining why they were late on payments for that certain period
  • Maybe it was because they were injured and off work
  • Maybe it was because they were out of work and could not pay bills
  • Maybe it was because they were separated and/or going through a divorce
  • Maybe it was because of illness in the family
  • Maybe it was because there was an extenuating circumstances that was out of the ordinary
  • Whatever the reason, make sure to document the date the late payment history was to the extenuating circumstances
  • Provide proof and/or documentation if possible such as medical bill receipts if injured, termination letter if out of work, divorce decree if divorce, or other documentation if at all possible
  • A letter of explanation to underwriters does not have to be long
  • A few sentences is fine
  • Should be brief and to the point with supporting documentation

All letters should be signed and dated and legible.

How To Write LOX

How To Write LOX

Letter of explanations is also referred as LOX or LOE:

  • LOX will be asked throughout the mortgage approval process
  • There is no pass or fail on letter of explanation to underwriters
  • LOX are requested to clarify information that underwriters has and needs more details in making a decision
  • Credit inquiries in a mortgage loan applicant’s credit report in the past 120 days will require explanations for every credit inquiry
  • Borrowers who have ten credit inquiries from mortgage companies, all they need to write on the lox is that they were shopping for mortgage
  • A one sentence will do

Bankruptcy and housing events needs to be addressed and explained.

Letter Of Explanation Due To Bankruptcy And Foreclosure

You will not be denied a home mortgage due to bankruptcy, foreclosure, deed in lieu of foreclosure, short sale. However, mortgage underwriters need a brief explanation for the reason why you filed bankruptcy and/or had a prior housing event. It can be just a few sentences and does not have to be lengthy. There is no right and/or wrong answer. Mortgage underwriters want to just document the reason. Mortgage underwriters are more concerned about rebuilt and reestablished credit after bankruptcy and/or a housing event.

Some common reasons why people filed bankruptcy or had housing event was due to the following:

  • periods of unemployment
  • divorce
  • medical reasons
  • business failure due to the recession
  • Again, lox does not need to be lengthy and a few sentences will suffice
  • Do not volunteer to much information
  • Answer the question the mortgage underwriter asks and no more
  • If borrowers volunteer more information than is requested, then a whole can of worms can open up

The loan officer should go over the letter of explanations you write with borrowers. Only address the main points on the LOX and not volunteer any other events. 

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