If everything on your mortgage application isn’t textbook material, it’s fairly certain that you’ll receive a request for a Letter of Explanation. Just what is this letter and how do you write it?
Keep reading to learn the specifics you must know in order to get the mortgage approval that you deserve.
What is a Letter of Explanation?
Simply put, a Letter of Explanation explains what your documents cannot do on their own. It’s a letter written by you explaining circumstances that the underwriter is questioning. Most often, it has to do with a gap in employment. But, that’s not the only reason. Underwriters often ask for the LOX for any of the following reasons:
- Large deposits
- Name changes
- Address changes
- Late payments
- Joint bank accounts
Basically, the underwriter needs more proof of why something such as a large, unidentified deposit is creating a red flag in your approval. They want an explanation from your viewpoint that helps the situation make sense in their mind.
The underwriter will keep the LOX in the event that a government agency (FHA or VA) or an investor comes back and questions the file.
How to Write the Letter of Explanation
While the Letter of Explanation isn’t extremely formal, there is a specific format you should follow and certain information you must include. This will give you the best chance of the underwriter accepting the letter and approving your loan file.
Before we get into the format, let us just say that you should keep it simple. Stick to the facts and don’t embellish anything. As long as you get your point across, that’s all the lender needs. If you go on too long or provide too much information, it could end up hurting rather than helping you.
Start the LOX as you would start any other letter – with the date and the salutation. Next, write a sentence that fully describes the reason for your letter. For example, ‘I am writing this letter to explain the late payment I made on my Capital One bill on 1/1/2017.’ This is short and to the point. It lets the underwriter know why you are writing to him or her.
Next, you’ll obviously want to explain the reason for the late payment. Make the explanation understandable, but short. If you were in the hospital and were not receiving income, you could say that. ‘I was in the hospital due to a car accident I was involved in and missed three weeks of pay.’
After you explain the reason, make sure you let the underwriter know how you resolved the issue. For example, ‘I have since been back to work and have gotten current on my Capital One bill. I have not made any late payments since that one occurrence.’
Again, this is short and to the point. If you went on and on explaining that you were laid up for three weeks and you were late on your utility bills and couldn’t afford groceries, you open up another can of worms. Instead, keep it short and sweet, letting the underwriter know just what is important and nothing else.
Sometimes you’ll have evidence to include with your Letter of Explanation. For example, if you have a large deposit in your account that was due to you selling stocks, you could provide the proof of the sale and receipt of the funds. This just helps to further the evidence that what you say in the LOX is true.
Documentation isn’t always necessary, but it’s a nice touch to help ensure that the underwriter accepts what you have to say.
The bottom line is that you must be as specific as possible on your Letter of Explanation. Include names, dates, and dollar amounts whenever possible. This way the underwriter can connect all of the dots regarding your loan application and decide if you are a good risk. If you leave anything open for more questions, it could delay the process and pave the way for a loan denial. The more specific you are and the more concrete your proof, the better your chance of approval.