Letter Of Explanations To Mortgage Loan Underwriters

This Article Is About Letter Of Explanations To Mortgage Loan Underwriters

Borrowers going through the mortgage approval process will oftentimes get requests for letters of explanation to mortgage loan underwriters.

• Loan officers will normally write the letter of explanations (LOX)  for borrowers
• Unfortunately, there are some loan officers that will just ask borrowers to write the letter
• My team and I often get calls and inquiries from borrowers on how to write a letter of explanations to mortgage loan underwriters
• Letter of explanations is part of the mortgage process
• Underwriters will ask for a letter of explanations on just about anything they need clarification
• Letter of explanations 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. 

No Need To Be Alarmed When Mortgage Underwriters Ask For LOX

Many mortgage applicants freak out when underwriters request a letter of explanation:

• 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

Letter of explanations to mortgage loan 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 is on other questionable items and/or line items the underwriter needs additional clarification.  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 explanations to mortgage loan underwriters needs to be signed and dated by the applicant:

• Letter of explanations are required for those having joint banking accounts, and those who have had overdrafts as well
• Some letters of explanations 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 Explanations To Mortgage Loan Underwriters

Lenders do not expect a long letter of explanation.

• 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
• 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 explanations
• 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. 

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

Homebuyers can qualify for Non-QM loans at Gustan Cho Associates.

• 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
• 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 is 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

Example of extenuating circumstance to 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

Gustan Cho Associates 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. Gustan Cho Associates 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 Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.