How To Write Letter of Explanation To Mortgage Underwriters

This guide will cover how to write a letter of explanation to mortgage underwriters during the home loan process. Borrowers are currently in the mortgage application, and the approval process will most likely get conditions to write a letter of explanation to underwriters when they get conditional mortgage approval. A letter of explanation will be requested throughout the mortgage process.

There is no need to get nervous when asked to write a letter of explanation to underwriters. This is normal, and mortgage underwriters will often ask for a letter of explanation to underwriters for any questionable issues that may need clarification.

Letters of Explanations to underwriters do not have to be letters. It needs to be just a one-liner or no more than a paragraph. The loan officer often talks to borrowers, and most loan officers will write a letter of explanation to underwriters on behalf of borrowers. Letter of explanation to mortgage underwriters should be short, concise, and to the point.

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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.

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