Letters Of Explanations To Mortgage Underwriters And How To Write Them

Gustan Cho Associates
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Letters Of Explanations To Mortgage Underwriters And How To Write Them

This BLOG On Letters Of Explanations To Mortgage Underwriters And How To Write Them Was UPDATED On June 3rd, 2019

Letters Of Explanations To Mortgage Underwriters
Gustan Cho Associates

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 1003. Completing a mortgage application officially starts the mortgage process.

  • The mortgage application, also known as 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 submit on matters mortgage underwriters need clarification

Documents Required To Process Mortgage

Documents Required To Process Mortgage
Gustan Cho Associates

Prior to processing and underwriting your mortgage loan application, the 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

Mortgage Processing
Gustan Cho Associates

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
  • It will then be assigned a mortgage underwriter

Mortgage Underwriting

Mortgage Underwriting
Gustan Cho Associates

It is the job of the underwriter to approve a mortgage loan.

  • Underwriters issue conditional mortgage loan approvals
  • Mortgage Underwriters issue clear to close
  • Mortgage application and the document submitted along with credit reports are reviewed by mortgage underwriters
  • The mortgage 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

Gustan Cho Associates

Once a mortgage loan application is assigned to an underwriter, the underwriter will get through the 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
  • Will want to see verification of employment letter from current employer
  • The underwriter will also check bank statements
  • 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
  • See the patterns of credit history
  • The mortgage underwriter will assess the risk level
  • 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

Types Of letters Of Explanations To Mortgage Underwriters
Gustan Cho Associates

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
  • Needs to be to the point
  • A wrong statement can blow the deal
  • The mortgage broker will help write the letter of explanation and review it prior to submitting it

Typical Requests For LOX

Gustan Cho Associates

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 a job, divorce, medical issues, identity theft, or other unforeseen circumstances
  • Borrowers who had a bankruptcy and/or foreclosure, the 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 a 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 was 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

Gustan Cho Associates

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 paycheck stubs, and pulling a current credit check on you and/or co-borrowers
  • Once these terms have been satisfied, the mortgage underwriter will issue a clear to close which is the clear go-ahead to schedule closing

For more information on this blog or other topics, please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com.

2 Comments
  1. disappointed reader says

    The title of this article is “How To Write Letters Of Explanations To Mortgage Underwriters”, but nowhere in the article is that question actually answered.

    1. Gustan Cho, NMLS 873293 says

      Thank you for reaching out to me and your concerns. The article is just a general guide that borrowers do not have to worry about writing a lengthy letter. A one liner stating facts is sufficient. Never volunteer more information than asked. If underwriters need more clarification they will request it. Feel free to contact me anytime if you have any questions or join our Forum. Thank you.

      Gustan Cho

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