How To Write a Letter of Explanation To Underwriters

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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 situations where a mortgage underwriter requests a loan 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. Your loan officer should write a letter of explanation for you.

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.

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 a letter of explanation 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 explanation 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 GCA Forums 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 and complete the four pages 1003.  

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.