Letter of Explanation to Mortgage Underwriters

This guide covers letter of explanation to mortgage underwriters. Borrowers going through the mortgage approval process will oftentimes get requests for letters of explanation to mortgage underwriters. Loan officers will normally write the letter of explanation to mortgage underwriters (LOX) for borrowers. Unfortunately, there are some loan officers that will just ask borrowers to write the letter of explanation to mortgage underwriters. My team and I often get calls and inquiries from borrowers on how to write a letter of explanation to mortgage underwriters. A letter of explanation is part of the mortgage process. Underwriters will ask for a letter of explanation on just about anything they need clarification. Letter of explanation is often referred to as LOX. LOX’s do not have to be actual letters. LOX’s should be brief, concise, no longer than a few sentences, and straight to the point. There is no right or wrong answer in a letter of explanation to mortgage underwriters.

No Need To Be Alarmed When Mortgage Underwriters Ask For LOX

Many mortgage applicants freak out when a request for a letter of explanation to mortgage underwriters. LOX requests are very common during the mortgage process. LOX is often requested by mortgage underwriters. This holds especially true on applicants with prior bad credit, a prior bankruptcy, a prior foreclosure, a prior deed in lieu of foreclosure, and a prior short sale. A letter of explanation to mortgage underwriters will be required for the following:

recent credit inquiries
late payments
irregular or large deposits

Other times when a letter of explanation is required, on other questionable items and/or line items, the underwriter needs additional clarification. A letter of explanation (LOX) does not need to be lengthy. It just needs to be one or two sentences, concise, clear, legible, facts only, and to the point.

How To Address Letter Of Explanations To Mortgage Underwriters

All letter of explanation to mortgage underwriters needs to be signed and dated by the applicant. Letter of explanation are required for those having joint banking accounts, and those who have had overdrafts as well. Some letters of explanation such as the lox due to an economic event are extremely important. The letter of explanation will be the deciding factor whether or not the file will go any further. Remember that all letter of explanations need supporting documents, which we will discuss on a later paragraph on this article.

Format On Letter of Explanation To Mortgage Underwriters

Lenders do not expect a long letter of explanation to mortgage underwriters. Sometimes a one or two-sentence letter of explanation is sufficient. Do not write a long letter of explanation. Do not volunteer other information that is not requested. This is because borrowers might open up another can of worms. There is no right or wrong answer that the mortgage underwriter expects on the letter of explanation to mortgage underwriters. Dale Elenteny says the following about letter of explanation to mortgage underwriters:

They just are looking for facts on the information that borrower provided that is not clarified. For example, lenders will review overall credit report and credit history. Any credit inquiries that is 120 days or newer needs letter of explanation.

Borrowers with 7 lenders on credit report as credit inquires, need to write on letter of explanation they were just shopping for a mortgage. One line statement, sign, date, and submit. It is that simple. No explanations on whether or not they got approved, denied, etc. Same with a bunch of credit card inquiries. All borrowers need to write is that they were shopping for credit cards with better interest rates. Same with automobile credit inquiries. A one statement letter of explanation stating that you were shopping for a car is sufficient in the LOX requested by the mortgage underwriter on the car finance company credit inquiry.

What Type Of LOXs Will Mortgage Underwriters Request

Mortgage underwriters can request borrowers to write letters of explanation on just about anything and everything:

Borrowers need to get used to writing letters of explanation during the mortgage process
Most experienced mortgage processors and loan officers know what line item underwriters will request letters of explanation
Therefore, they request ahead of time for borrowers to write a letter of explanation on credit disputes, irregular deposits, collection accounts, bankruptcy, foreclosure, the gap in employment, and/or other issues

By getting the letter of explanation completed and submitted to the mortgage underwriter prior to her asking for it save time and makes the underwriter happier and focused.

How To Write Letter Of Explanations To Mortgage Underwriters

Again, your loan officer should coach you on actually what to write on LOX’s.

Letter of explanations do not have to be lengthy
A few sentences are sufficient and will do the job. Letters of explanation should be short, concise, and to the point
If you have supporting documents and/or attachments, please do so along with the LOX
The more clear and obvious a condition is to the mortgage underwriter, the quicker it gets cleared
Underwriters need all of the documents they are underwriting in front of them
The easier the underwriter finds answers to important items they are underwriting, the quicker they will sign off on the conditions at hand
This is why a short, concise, to-the-point of letter of explanations with supporting documents and/or paperwork, will make the underwriting process easier and quicker

If a mortgage underwriter sees the file is well organized, legible, has supporting documents/paperwork, sooner the underwriter can sign off on all conditions and issue a clear to close.

Letter Of Explanations To Mortgage Loan Underwriters On Recent Late Payments

When a mortgage underwriter requests a letter of explanation on recent late payments, again, all borrower needs to do is write a brief one or two sentence lox, sign, and date.

There is no right or wrong answer in writing a letter of explanation
If consumer forgot to make the payment, just write a one- or two-sentence that they overlooked the minimum payments due to whatever the reason
It may have been when they were sick, were out of work, or had a dispute with the credit card company
There is no correct answer
It is not a pass or fail test with letters of explanations

There are no right or wrong answers from LOX.

What Is The Purpose Of a Letter Of Explanation To Underwriters

A letter of explanation, often called LOX or LOE, is normally requested on purchase and refinance mortgage loan applications from the mortgage underwriter. A letter of explanation to the mortgage underwriter should be a one-line or two-sentence answer and not a long story. Mortgage underwriters are seeking an answer on any out-of-the-ordinary circumstances during the mortgage process.

When there are issues with items on late payments, bankruptcies, foreclosures, multiple credit inquiries, job gaps, unpaid collections, judgments, tax liens, charge-offs, and other arbitrary items that are not obvious and can be ambiguous A letter of explanation is one of the first items that is requested to explain extenuating circumstances on mortgage loan programs.

Loan Programs such as the FHA Back to Work Extenuating Circumstances due to economic events about the borrower’s unemployment or underemployment affected his or her household income for the past six months or more before initiating the bankruptcy or foreclosure required a detailed letter of explanation.

Writing A Letter Of Explanation To Underwriters

When borrowers are asked for LOX, the mortgage loan originator will coach them on how to write it so it explains the requested circumstances and is worded correctly. Most loan officers will write a LOX on behalf of the borrower. The borrower should address the situation’s circumstances, why it happened, and what the borrower did to solve it. If a situation was bankruptcy or foreclosure, explain the extenuating circumstances leading to the bankruptcy or foreclosure, such as the following:

Unemployment
Divorce
Death in the family
Medical issues
Loss of business

Then explain how they have recovered and what they did to re-establish credit. A LOX is required for every credit inquiry within the past three to six months. Most of the time, a simple statement like applying for a mortgage is sufficient for credit card inquiries. A statement like shopping for better credit card interest rates is sufficient.

LOX On Owner-Occupant Homes

A detailed LOX will be required for those currently living in an owner-occupied home but intend on upgrading or downsizing. Why is the borrower buying a second home, and what are their intentions? What is the intention of purchasing the larger home with the home they are moving out of the current owner-occupied home? Answers like these will be sufficient. We intend to list and sell our current owner-occupied home after moving in.

Most loan officers will help you write a LOX to mortgage underwriters. All LOXs need to be signed, and dated by the borrowers. Underwriters are not looking for no more than one or two sentences on the LOX.

We are moving from our current owner-occupant home because it is only 800 square feet and needs more space. It is too small for our family of 5. Our new purchase will be used as an owner-occupant residence, and it is 2,000 square feet, much larger than the 800 square feet home. These statements for your letter of explanation will make sense to the mortgage underwriter.

Non-QM Loans & Bank Statement Loans For Self Employed Borrowers

Homebuyers can qualify for non-QM loans at Mortgage Lenders for Bad Credit. Non-QM loans have no waiting period after bankruptcy, foreclosure, deed in lieu of foreclosure, short sale. One day out of a housing event qualifies for non-QM loans. A 10% to 30% down payment is required on non-QM loans. The minimum credit scores is 500 FICO. 660 credit scores require a 15% down payment. 680 credit scores require a 10% down payment. The primary importance with non-QM loans is lender will request from the borrower a letter of explanation. The letter of explanation needs to be extremely detailed and cover the chain of events for the past several years.

Extenuating Circumstances Case Scenarios

An example of extenuating circumstances to a housing event would be the following:

Due to being out of work, this was the cause of being forced to bankruptcy, foreclosure, deed in lieu of foreclosure, short sale
This economic event affected borrowers which caused reduction of their household income for at least six or more months and was the cause of housing event
The borrower has recovered and obtained full-time employment and now can afford a new home purchase
Need to show that they have re-established their credit and no late payments after housing and/or economic event

Mortgage Lenders for Bad Credit Mortgage Group is a full-service mortgage company licensed in multiple states with no overlays on government and conventional loans. We have no lender overlays on government and conventional loans. We just go off the automated findings of the automated underwriting system (AUS) and have zero lender overlays. Mortgage Lenders for Bad Credit are also correspondent lenders on non-QM loans, bank statement loans for self-employed borrowers, asset=depletion mortgages, fix and flip loans, and our newest P and L no-doc statement income mortgage programs. We have a national reputation for being a one-stop mortgage shop due to having dozens of non-QM wholesale lending relationships. The team at Mortgage Lenders for Bad Credit s available 7 days a week, evenings, weekends, and holidays.