This guide will cover how to write a letter of explanation to mortgage underwriters. Letters of explanation. often referred to as LOX, will be asked during the loan process. Those who have gone through the mortgage application process have encountered where a mortgage underwriter requests a LOX on certain issues. LOX will be asked for borrowers who had a prior bankruptcy, a prior foreclosure, a prior deed-in-lieu of foreclosure, or a prior short sale. A mortgage underwriter may also ask for a LOX for the following reasons:
- large or irregular deposit on a bank account
- credit inquiries
- late payments
- overdrafts in bank accounts
- charged-off accounts
- collection accounts
- gaps in employment
- other questionable items on your credit report or mortgage loan application
A LOX is part of the mortgage process, and borrowers should not be nervous about it. You loan officer should write a letter of explanation for you.
When Do Mortgage Underwriters Request a Letter of Explanation
Many borrowers, especially first-time home buyers, panic when mortgage underwriters ask for a letter of explanation. The reason underwriters ask for a letter of explanation to mortgage underwriters is so the subject matter needs clarification. For example, a letter of explanation to mortgage underwriters may be requested if borrowers had a major reduction in income in a certain year. It may be because of a reduction in income due to the following reasons:
- maternity leave
- injury
- personal extended vacation
- school
- temporary lay off
- or personal issues
There is no right or wrong answer. Underwriters need clarification on concerns to issue a mortgage approval.
How To Write a Letter Of Explanation To Mortgage Underwriters
A letter of explanation to mortgage underwriters does not have to be long. One or two sentences or a paragraph explaining the issues is sufficient. Only answer the items that the mortgage underwriter asks. Do not go off on a tangent because you do not want to open a can of worms. For example, if the mortgage underwriter asks for the reason for filing bankruptcy, tell them the reason why for filing bankruptcy.
Letter of Explanation For a Job Loss
If a job was lost, that was the reason for filing for bankruptcy. Just state the job loss and the reason for filing bankruptcy. An example will be :
- I was laid off from my employer XYZ
- Could not secure full-time employment until eight months later
- Due to having no household income and creditors calling me, I had no choice but to file for bankruptcy and get a fresh start.
- Sign and date the letter of explanations.
Explanation For Credit Inquiries
As for credit inquiries, a one-liner on each credit inquiry, such as the following:
- applying for mortgage
- applying for better interest-rate credit cards
- shopping for a car loan etc., will be sufficient
- Letter of explanations for a large or irregular Deposit
Mortgage underwriters will question large or irregular deposits. All large and irregular deposits must be sourced for the down payment or closing costs. An example of letter of explanations for a large or irregular deposit can be a vehicle sale. For the mortgage loan applicant to be able to use the funds from the sale of the car for a down payment or closing costs, LOX is required, as well as supporting documents such as a copy of the check, deposit slip, and bill of sale. A letter of explanations is required for any irregular deposit of $200 or more.
The lOX Should Be Short and To The Point
Again, as mentioned earlier, a LOX does not need to be lengthy and should not be a multi-page story. A few sentences to no more than a paragraph and should just be focused on the matter at hand. Alex Carlucci of Gustan Cho Associates advises the following when it comes to writing a LOX to underwriters:
Most loan officers will go over or actually write the LOX for the mortgage underwriters. You should not sweat when mortgage underwriters ask for a letter of explanation.
Sign and date it and submit it to the mortgage loan originator to review before it gets submitted to underwriting. Borrowers who need pre-approval, click APPLY NOW and complete the four pages 1003. The team at Gustan Cho Associates is available seven days a week, including holidays and weekends. We can be reached at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.
