How To Write Letters Of Explanations To Mortgage Underwriters

This BLOG On How To Write Letters Of Explanations To Mortgage Underwriters Was UPDATED On July 16, 2017

Mortgage Borrowers who are either buying a home or homeowners who are refinancing their home loan go through the mortgage process by completing and submitting a mortgage application called the 1003. Completing a mortgage application officially starts the mortgage process.

  • The mortgage application, also known as the 1003, asks information about income, debts, and assets. 
  • It also asks disclosures such as if the borrower filed bankruptcy, had a foreclosure, had a judgment, had tax liens, or short sale. 
  • It is of utmost importance that mortgage applicants answer these questions as accurately and truthfully as possible.
  • All information stated on mortgage application will be verified.
  • Letters of explanations to mortgage underwriters will need to submitted on matters mortgage underwriters need clarification.

Documents Required To Process Mortgage

Prior to processing and underwriting your mortgage loan application, the mortgage loan officer will ask borrowers to provide financial documents such as the following:

  • Two years tax returns
  • 2 months bank statements
  • W-2’s for the past two years
  • 30 days most recent paycheck stubs
  • Bankruptcy papers if it applies
  • Foreclosure papers if it applies
  • Divorce decree
  • Other documents such as judgment release and tax release paperwork. 

Mortgage Processing

Once these documents are submitted, the loan officer will then start the mortgage process.

  • The mortgage loan application will be assigned a mortgage processor and prepared for underwriting.
  • Once the mortgage processor makes sure that all documents are complete with no missing pages, the loan will be submitted to the lender’s underwriting department and assigned a mortgage underwriter.

Mortgage Underwriting

  •  It is the job of the underwriter to approve mortgage loan.
  • Underwriters issue conditional mortgage loan approvals.
  • Mortgage Underwriters issue clear to close
  • Mortgage application and the document submitted along with credit reports is reviewed by the mortgage loan underwriter. 
  • The mortgage loan underwriter fully understand credit and financial profile and any questions, letters of explanations to mortgage underwriters need to be submitted.

How Underwriters Underwrite Mortgage Files

Once mortgage loan application is assigned to an underwriter, the underwriter will got through mortgage application, credit reports, and all of the documents submitted.

  • The mortgage loan underwriter will review 2 years tax returns.
  • The tax returns will need to be verified with the Internal Revenue Service through 4506T. 
  • The underwriter will review W-2’s and will want to see a verification of employment letter from current employer. 
  • The underwriter will also check bank statements and see if there are any overdrafts in checking or savings account in the past 12 months. 
  • The mortgage underwriter will also review bankruptcy papers for borrowers who  filed a prior bankruptcy. 
  • Underwriters will also review derogatory items on credit report and see the patterns of credit history. 
  • The mortgage underwriter will assess risk level and if he or she believes whether borrowers will pay future mortgage payments.
  • The mortgage underwriter will then issue you a conditional mortgage loan approval.

Types of letters of explanations to mortgage underwriters

Prior to issuing a conditional approval, you may be required to write letters of explanations to mortgage underwriters for questionable items.

  • Letters of explanations to mortgage underwriters need to be brief and to the point and  a wrong statement can blow the deal.
  • Mortgage broker will help write the letter of explanation and review it prior to submitting it. 

Typical Requests For LOX

Some examples of letters of explanations to mortgage underwriters are the following:

  • Borrowers who have unsatisfied collection accounts, mortgage underwriters will want to explain why the account went into arrears and the debt has not been paid.
  • Some valid reasons can be loss of job, divorce, medical issues, identity theft, or other unforeseen circumstances.
  • Borrowers who had a bankruptcy and/or foreclosure, underwriter will want to know a letter of explanation on why they filed bankruptcy or went through foreclosure.
  • Some reasons can be due to loss of job, closure of business, medical issues, or divorce.
  • Too many credit inquiries. 
  • Every credit inquiry within the past 90 days will need letters of explanations to mortgage underwriters. 
  • Some reasons can be shopping for a mortgage, shopping for a lower interest rate credit card, or some other reasonable explanation where it will prove to the mortgage loan underwriter that the borrower were not desperately seeking new credit due to financial troubles.
  • Self employed individuals might need to prove that their business is most likely to continue via letters of explanation to mortgage underwriters.
  • Job gap
  • Letters of explanations to mortgage underwriters will need to be submitted if borrowers had job gaps in the past two years or periods of unemployment.

Clear To Close

  • Once mortgage loan applicants have supplied letters of explanations to mortgage underwriters, they will be issued a conditional approval. 
  • There will be conditions that should easily be satisfied. 
  • Such conditions may be insurance information, the most recent bank statements, the most recent pay check stubs, and pulling a current credit check on you and/or co-borrowers. 
  • Once these terms have been satisfied, the mortgage loan underwriter will issue a clear to close which is the clear go ahead to schedule closing.
The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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