Gustan Cho The Mortgage Expert,
Publish On: December 5, 2022
In this blog, we will cover how to write a letter of explanation to mortgage underwriters. Borrowers planning on applying for home loans or are currently going through the mortgage process will encounter underwriters who will require a letter of explanation for one or more items in question. This is often the case if borrowers have previous credit issues or many credit inquiries on the credit reports. A letter of explanation (LOX) to mortgage underwriters is often requested.
The letter of explanation should be carefully thought out before it is submitted. The mortgage loan originator will most likely review the letter of explanation before submitting it to the underwriter 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 a letter of explanation 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 their credit reports. When a mortgage loan underwriter reviews a credit report and sees multiple credit inquiries, a letter of explanation 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. The need to state in the letter of explanation 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, which is why they are applying for multiple credit cards at once. If this is the case where there are multiple credit card inquiries, write “Shopping for credit cards for the best available rates.” This letter of explanation will be sufficient.
There are also other letters of explanation that need to be more detailed. Borrowers seeking a home loan with bad credit before bad credit issues may also need letters.
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 need to write a detailed letter of explanation as to 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 explanation, make sure to provide supporting documents.
If the job was lost for some time, along with LOX, provide proof such as W-2s, tax returns, and paycheck stubs before and after a job loss. Everything in a letter of explanation should be documented. There are cases where mortgage underwriters will require multiple letters of explanation. A letter of explanation might be required if borrowers have gaps in employment or are unemployed for some time.
Home Loan After Bankruptcy and Foreclosure
There is a mandatory three-year waiting period after the recorded foreclosure date or deed-in-lieu of foreclosure to qualify for FHA and USDA loans. The waiting period for VA loans after the housing event is two years. FHA, VA, and USDA loans require a 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 short sale date, 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 frequently get requests for letters of explanation from mortgage underwriters. Loan officers normally write a letter of explanation (LOX) for borrowers.
Unfortunately, some loan officers will ask borrowers to write a letter. My team and I often get calls and inquiries from borrowers on how to write letters of explanation to mortgage underwriters.
Do Not Be Alarmed When Asked For LOX
Many mortgage applicants freak out when underwriters request a letter of explanation. LOX requests are very common during the mortgage process. Mortgage underwriters often request LOX. This holds especially on applicants with prior bad credit, prior bankruptcy, prior foreclosure, a prior deed instead of foreclosure, and prior short sale.
Letters of Explanations For Derogatory Tradelines
A letter of explanation 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 explanation needs to be signed and dated by the applicant. A letter of explanation is required for those with joint banking accounts and those who have had overdrafts.
Some letters of explanation, such as the lox due to an economic event, are extremely important. The letter of explanation will be the deciding factor in whether or not the file will go any further. Remember that all letters of explanation need supporting documents, which we will discuss later in 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.
What Is The Right Answer In a Letter of Explanation For Mortgage Approval?
There is no right or wrong answer that the mortgage underwriter expects in the letter of explanation. They are looking for facts on the information the borrower provided that is not clarified. For example, lenders will review the comprehensive credit report and credit history. Any credit inquiries that are 120 days or newer need a letter of explanation. Borrowers with seven lenders on the credit report as credit inquiries need to write a letter of explanation they were 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, write 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 explanation.
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, or short sale. One day out of a housing event qualifies for non-QM loans. A 20% down payment is required. The minimum credit scores are 640. Six hundred sixty credit scores require a 15% down payment.
Six hundred eighty credit scores require a 10% down payment. The primary importance of non-QM loans is the lender will request from the borrower 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 for a housing event would be:
- Being out of work was the cause of being forced into 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, obtained full-time employment, and can now afford a new home purchase.
- Need to show that they have re-established their credit and have no late payments after housing and 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 seven days a week, evenings, weekends, and holidays.
How To Write Letters of Explanations To Mortgage Underwriters
A letter of explanation to mortgage underwriters is often required when underwriters see discrepancies in 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 do 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 explanation to mortgage underwriters will be required for every credit inquiry. Credit inquiry letters of explanations to mortgage underwriters do not need long letters. It can be just a one-liner.
How To Write Letter of Explanation To Mortgage Underwriters For Credit Inquiries?
Borrowers with multiple credit inquiries from automobile finance companies must state they are shopping for a car. Borrowers’ multiple inquiries from mortgage companies need to state they are shopping for a mortgage. Same with credit cards. For 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 needs to do a check-off on each credit inquiry 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 when a letter of explanation to mortgage underwriters needs to be somewhat detailed is when borrowers have late payments after bankruptcy and housing event. Most lenders would kill a file if borrowers had late payments after bankruptcy and foreclosure.
Late Payments after bankruptcy and foreclosure are not always a deal killer. However, most lenders consider late payments after bankruptcy and foreclosure a second-time offender and will automatically not want to qualify such borrowers. They need exact extenuating circumstances of late payments and need to explain it in their letter of explanation.
Sample Letter of Explanations To Mortgage Underwriters on Late Payments After Bankruptcy
Mortgage underwriters fully understand that people can endure periods of financial hardship. There are reasons why people file for bankruptcy and lose their homes for non-payment. Underwriters will want to see the reason for bankruptcy and foreclosure.
The borrower needs to have had good credit before initiating bankruptcy and foreclosure. Had to have been unemployed and underemployed before the initiation of bankruptcy and foreclosure, resulting in a reduction in household income. The borrower had bad credit before the start of their financial hardship. They will not qualify because they do not know the importance of credit.
How Much Will My Credit Score Drop After Bankruptcy?
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 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 foreclosure were caused by the applicant being terminated from his or her employment. This was beyond his or her control or other extenuating circumstances. The borrower needs to have since recovered and is 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 a Mortgage Broker With No Overlays
Homebuyers 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 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.
Lenders With No Overlays on Government and Conforming Loans
We have zero overlays on FHA, VA, USDA, and conventional loans. Gustan Cho Associates are mortgage brokers on non-QM loans and bank statement loans for self-employed borrowers.
Gustan Cho and his team of veteran mortgage professionals are ready to answer any questions home buyers or homeowners with mortgage inquiries. Gustan Cho Associates Academy is a group of real estate and mortgage industry experts, which includes the following: real estate agents, residential mortgage loan officers, and industry experts whose mission is to provide information about real estate, conforming loans, non-conforming loans, and specialty financing programs. The mortgage industry is so complex, with new regulations constantly changing. New rules and regulations are being implemented, and our goal is to express the opinions of industry experts and offer their opinion Contact us today.
Letters of Explanation are part of the overall mortgage process. Borrowers should not be alarmed when a mortgage underwriter asks for multiple LOXs. To qualify with a mortgage broker licensed in 48 states with no mortgage overlays, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.
