How To Write a Letter of Explanation To Underwriters

---

In this article, we will cover how to write a letter of explanation to underwriters. Writing a letter of explanation to underwriters to underwriters is part of the mortgage approval process. Mortgage underwriters will require a letter of explanation from mortgage loan applicants for derogatory items that are reported on the mortgage loan applicant’s credit report, such as the following:

• prior bankruptcy
• foreclosure
• deed in lieu of foreclosure
• charge offs
• collection accounts
• late payments
• irregular items such as large and irregular deposits
• gaps in employment
• part-time job
• bonus income
• declining income
• other out-of-the-norm situations

In the following paragraphs, we will discuss how to write a letter of explanation to underwriters.

Reason For Letter Of Explanation To Underwriters

Mortgage Underwriters need to cross-check every borrower file they underwrite. A letter of explanation to underwriters is required, so it explains mortgage lending risks. Mortgage underwriters normally want documentation attached to the letter of explanation.

When Is a Letter of Explanation Required

For example, a letter of explanation may be required if borrowers have one or more of the following situations. A substantial low income one year from the previous year. If the borrower had a late payment history in the past 12 months. It needs to be explained if the late payment was due to a medical injury.

A letter of explanation needs to be written for the underwriter if the mortgage loan applicant was out of work and could not make the minimum payments.  Then it needs to be addressed.

A letter of explanation stating that the borrower was injured, along with a note from a medical doctor and receipts of his or her medical and hospital bills, will provide a strong case for extenuating circumstances. This will prove that this was a one-time event. However, for borrowers with a history of late payments throughout the years without solid extenuating circumstances, LOX stating they forget to pay will not go towards the applicant’s favor.

Reasons When Letter Of Explanation To Underwriters Are Required

There are many reasons why a letter of explanation to underwriters is required. Borrowers with a prior bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale, letter of explanation to underwriters will be required. Those with periods of layoff or gaps in employment will need to write a letter of explanation to underwriters.

Periods of bad credit or late payments need to be addressed. When writing LOX on periods of bad credit or late payments, borrowers need to write a simple letter outlining why they were late for that period. Maybe it was because they were injured and off work. Maybe it was because they were out of work and could not pay bills. Maybe it was because they were separated or going through a divorce. Maybe it was because of illness in the family.

Maybe it was because an extenuating circumstance was out of the ordinary. Whatever the reason, make sure to document the date the late payment history was to extenuating circumstances. Provide proof or documentation if possible such as medical bill receipts if injured, termination letter if out of work, divorce decree if divorce, or other documentation if possible. A letter of explanation to underwriters does not have to be long. A few sentences are fine. It should be brief and to the point with supporting documentation. All letters should be signed and dated, and legible.

How To Write LOX

A letter of explanation is also referred to as LOX or LOE. LOX will be asked throughout the mortgage approval process. There is no pass or fail on the letter of explanation to underwriters.

LOX is requested to clarify information that underwriters have and needs more details in making a decision. Credit inquiries in a mortgage loan applicant’s credit report in the past 120 days will require explanations for every credit inquiry.

Borrowers with ten credit inquiries from mortgage companies must write on the lox that they were shopping for a mortgage. One sentence will do. Bankruptcy and housing events need to be addressed and explained.

Letter Of Explanation Due To Bankruptcy And Foreclosure

You will not be denied a home mortgage due to bankruptcy, foreclosure, a deed in lieu of foreclosure, or a short sale. However, mortgage underwriters need a brief explanation for why you filed for bankruptcy and had a prior housing event. It can be just a few sentences and does not have to be lengthy. There is no right or wrong answer. Mortgage underwriters want to document the reason. Mortgage underwriters are more concerned about rebuilt and reestablished credit after bankruptcy or a housing event.

Common Reasons For Borrowers Who Filed Bankruptcy

Some common reasons why people filed for bankruptcy or had housing event was the following:

• periods of unemployment
• divorce
• medical reasons
• business failure due to the recession
• Again, lox does not need to be lengthy, and a few sentences will suffice
• Do not volunteer too much information
• Answer the question the mortgage underwriter asks, and no more
• If borrowers volunteer more information than is requested, then a whole can of worms can open up

The loan officer should review the letter of explanation you write to borrowers. Only address the main points on the LOX, and do not volunteer for any other events.  The letter of explanation to underwriters should be no more than a couple of sentences to the point and not steer off to a different subject matter. Never volunteer other information. Stay focused on the topic at hand. If you have supporting documents and data, make sure to include those with the letter of explanation to underwriters. No need to write a long story. The mortgage underwriter will not care about a long story on your personal life. Just facts and only facts.