How To Write Letter Of Explanations To Mortgage Underwriters

This Article Is About How To Write Letter Of Explanations To Mortgage Underwriters 

Borrowers planning on applying for home loans or are currently going through the mortgage process will encounter underwriters who will require letter of explanations for one or more items in question. This is often the case if borrowers had prior credit issues or many credit inquiries on the credit reports. Letter of explanations (LOX) to mortgage underwriters is often requested.

Letter of explanations should be carefully thought out before it is submitted. The mortgage loan originator will most likely review the letter of explanations prior to submitting it to the underwriter who is underwriting the mortgage file. LOX (Letter Of Explanations) does not need to be lengthy. Most loan officers will write the LOX on behalf of borrowers. In this article, we will cover and discuss how to write letter of explanations to mortgage underwriters during the mortgage process.

Cases Where LOX Is Required

One of the most common cases where LOX is required is when borrowers have multiple credit inquiries on credit report. When a mortgage loan underwriter reviews a credit report and sees multiple credit inquiries, letter of explanations will be required. The LOX for credit inquiries is always required. Letters are required for credit inquiries but do not have to be detailed.

For example, borrowers with multiple credit inquiries from multiple lenders, need to state just “Shopping for a mortgage”. It is the same case with multiple credit inquiries from auto finance companies. Need to state on the letter of explanations is “Shopping for cars”. Lenders do not like seeing multiple credit inquiries. Each inquiry will be analyzed and reviewed and see if the creditor has granted credit to the applicant. If the creditor has granted credit, this potentially means new debt for the consumer which could affect the debt to income ratio.

Letter Of Explanation For Multiple Credit Inquiries

If someone is applying for multiple credit cards, this might show that the applicant is desperate for money and that is the reason why they are applying for multiple credit cards at once. If this is the case where there are multiple credit card inquiries is just write “Shopping for credit cards for the best available rates”. This letter of explanation will be sufficient. There are also other letters of explanation where it needs to be more detailed. Borrowers seeking a home loan with bad credit prior to bad credit issues may need letters as well.

Letter Of Explanations For Periods Of Bad Credit

For example, borrowers with a history of good credit and payment history but all of a sudden could not make payments on monthly credit obligations and credit scores suffered due to the loss of job, they need to write a detailed letter of explanations as of why they could not pay their bills and the circumstances surrounding it. In this particular case, borrowers would need to explain to them about job loss. When writing a letter of explanations, make sure to provide supporting documents.

If the job was lost for a period of time, along with LOX, provide proof such as W-2s, tax returns, and paycheck stubs prior to loss of job and after. Everything in letter of explanations should be documented. There are cases where mortgage underwriters will require multiple letters of explanations. Letter of explanations might be required if borrower had gaps in employment or if they been unemployed for a period of time.

Home Loan After Bankruptcy And Foreclosure

There is a mandatory three year waiting period after the recorded date of a foreclosure or deed in lieu of foreclosure to be able to qualify for FHA and USDA Loans. Waiting period on VA Loans after housing event is two years. FHA, VA, USDA Loans require two year waiting period after Chapter 7 Bankruptcy. For those who had a prior short sale, there is a three-year waiting period after the date of the short sale which is reflected on the HUD’s settlement statement of the short sale to qualify for FHA and USDA loans. On VA Home Loans, the waiting period is two years.

Loan Officers Will Help Borrowers With LOX

Borrowers going through the mortgage approval process will oftentimes get requests for letter of explanations by mortgage underwriters. Loan officers will normally write the letter of explanations (LOX)  for borrowers. Unfortunately, there are some loan officers that will just ask borrowers to write the letter. My team and I often get calls and inquiries from borrowers on how to write letter of explanations to mortgage underwriters.

Do Not Be Alarmed When Asked For LOXShould I worry when you are asked for LOX

Many mortgage applicants freak out when underwriters request a letter of explanation. LOX requests are very common during the mortgage process. LOX is often requested by mortgage underwriters. This holds true especially on applicants with prior bad credit, a prior bankruptcy, a prior foreclosure, a prior deed in lieu of foreclosure, and a prior short sale.

Letters Of Explanations For Derogatory Tradelines

Letter of explanations will be required for the following:

  • recent credit inquiries
  • late payments
  • irregular or large deposits
  • other questionable items a mortgage underwriter may have concerns with

Format Of Letter Of Explanations To Mortgage Underwriters

All letter of explanations needs to be signed and dated by the applicant:

  • Letter of explanations are required for those having joint banking accounts, and those who have had overdrafts as well
  • Some letters of explanations such as the lox due to an economic event are extremely important
  • The letter of explanation will be the deciding factor whether or not the file will go any further

Remember that all letter of explanations need supporting documents, which we will discuss in a later paragraph of this article.

Letter Of Explanations To Mortgage Underwriters Needs To Be Brief

Mortgage lenders do not expect a long letter of explanation.

  • Sometimes a one or two-sentence letter of explanation is sufficient
  • Do not write a long letter of explanation
  • Do not volunteer other information that is not requested
  • This is because borrowers might open up another can of worms
  • There is no right or wrong answer that the mortgage underwriter expects on the letter of explanation
  • They just are looking for facts on the information that the borrower provided that is not clarified
  • For example, lenders will review the overall credit report and credit history
  • Any credit inquiries that is 120 days or newer needs letter of explanations
  • Borrowers with 7 lenders on the credit report as credit inquires, need to write on letter of explanation they were just shopping for a mortgage
  • One line statement, sign, date, and submit
  • It is that simple
  • No explanations on whether or not they got approved, denied, etc
  • Same with a bunch of credit card inquiries
  • All borrowers need to write is that they were shopping for credit cards with better interest rates
  • Same with automobile credit inquiries

One statement lox stating that you were shopping for a car.

Letter Of Explanations To Mortgage Underwriters On Recent Late Payments

When a mortgage underwriter requests a letter of explanation on recent late payments, again, all borrower needs to do is write a brief one or two sentence lox, sign, and date. There is no right or wrong answer in writing a letter of explanation. If consumers forgot to make the payment, just write a one or two-sentence that they overlooked the minimum payments due to whatever reason. It may have been when they were sick, were out of work, or had a dispute with the credit card company. There is no correct answer. It is not a pass or fail test with letters of explanations.

Non-QM Loans & Bank Statement Loans For Self Employed Borrowers

Homebuyers can qualify for non-QM loans with Gustan Cho Associates. Non-QM Loans have no waiting period after foreclosure, deed in lieu of foreclosure, short sale. One day out of a housing event qualifies for non-QM loans. 20% down payment is required. Minimum credit scores are 640. 660 credit scores require 15% down payment. 680 credit scores require a 10% down payment. The primary importance with non-QM loans is the lender will request from the borrower is a letter of explanation. The letter of explanation needs to be extremely detailed and cover the chain of events for the past several years.

LOX On Extenuating Circumstances

An example of an extenuating circumstance to housing event would be:

  • Due to being out of work, this was the cause of being forced to bankruptcy, foreclosure, deed in lieu of foreclosure, short sale
  • This economic event affected borrowers which caused the reduction of their household income for at least six or more months and was the cause of the housing event
  • The borrower has recovered and obtained full-time employment and now can afford a new home purchase
  • Need to show that they have re-established their credit and no late payments after housing and/or economic event

Gustan Cho Associates is a full service direct lender with no overlays on government and conventional loans. We are correspondent lenders on non-QM loans and bank statement loans for self-employed borrowers. We are available 7 days a week, evenings, weekends, and holidays.

How To Write Letter Of Explanations To Mortgage Underwriters

Letter of explanations to mortgage underwriters is most often required when underwriters sees discrepancies on a borrower’s information on what he or she stated on the application and documents provided.

For example, if the monthly wages of the borrower does not match the W-2s and the borrower took time off work due to medical reasons, clarification is required. Or other reasons, a detailed letter of explanation (LOX) is required. For borrowers with multiple credit inquiries on a credit report, a letter of explanations to mortgage underwriters will be required for every single credit inquiry. Credit inquiry letter of explanations to mortgage underwriters does not need to be actually long letters. It can be just a one-liner.

For example, borrowers multiple credit inquiries from automobile finance companies, all they need to state is shopping for a car. Borrowers multiple inquiries from mortgage companies need to state is shopping for a mortgage. Same with credit cards. Borrowers with multiple credit inquiries from credit card companies, all they need to state is shopping for credit card interest rates.

Letter of explanation for credit inquiries is not deal breakers. If the underwriter does not like it or does not provide enough clarification, the underwriter will request a more detailed LOX. The underwriter just needs to do a check-off on each credit inquiry in order to move forward. Most loan officers will write the Letter Of Explanations To Mortgage Underwriters on behalf of their borrowers.

Case Scenarios Where A Good LOX Is Crucial

One of the most important times where a letter of explanations to mortgage underwriters needs to be somewhat detailed is on cases when borrowers have late payments after bankruptcy and/or housing event. Most lenders will kill a file if borrowers had late payments after bankruptcy and foreclosure.

Late Payments after bankruptcy and foreclosure is not always a deal killer. However, most lenders consider late payments after bankruptcy and/or foreclosure a second-time offender and will automatically not want to qualify such borrowers. Need detailed extenuating circumstances of late payments and need to explain it on their letter of explanation.

Sample Letter Of Explanations To Mortgage Underwriters On Late Payments After Bankruptcy And Housing Event

Mortgage underwriters fully understand that people can go through periods of financial hardship. There are reasons why people file for bankruptcy and/or lose their homes for non-payment. Underwriters will want to see the reason for bankruptcy and/or foreclosure. The borrower needs to have had good credit prior to the initiation of the bankruptcy and/or foreclosure. Had to have been unemployed and/or underemployed prior to the initiation of bankruptcy and/or foreclosure which has resulted in a reduction in household income. The borrower had bad credit prior to the start of their financial hardship. They will not qualify because of their lack of knowing the importance of credit.

The credit will plummet due to bankruptcy and foreclosure. The borrower needs to have re-established credit. The letter of explanation does not have to be a novel. It just needs to list facts and along with the letter of explanation. Attach any supporting documents such as the termination letter, past W-2s, and paycheck stubs. The underwriter wants to see that the bankruptcy and/or foreclosure was caused by the applicant being terminated from his or her employment. This was was beyond his or her control or other extenuating circumstances. The borrower needs to have since recovered and fully employed with re-established credit.

The borrower then had late payments after bankruptcy due to the following reasons:

  • Unemployment?
  • Health?
  • Divorce?
  • Other solid reason

Forgetting to pay bills is not a good excuse. Discuss the reason for late payment after bankruptcy and/or housing event and have the loan officer assist in writing it which is acceptable to the underwriter.

Qualifying For Mortgage With Direct Lender With No OverlaysHow Qualifying For Mortgage With Direct Lender With No Overlays

Home Buyers or homeowners who need to qualify for a mortgage with a national direct lender with no mortgage overlays on government and conventional loans can contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] We have zero overlays on FHA, VA, USDA, and conventional loans. Gustan Cho Associates are correspondent lenders on non-QM loans and bank statement loans for self-employed borrowers.

Letters Of Explanations is part of the overall mortgage process. Borrowers should not be alarmed when a mortgage underwriters asks for multiple LOX’s. To qualify with a direct lender with no mortgage overlays, please contact us at The Gustan Cho Team at 262-716-8151 or text us for a faster response. Or email us at [email protected]

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