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HomeFinancingDown Payment AssistanceA Mortgage Guide: An explanation letter for a mortgage loan (with template)

A Mortgage Guide: An explanation letter for a mortgage loan (with template)

Your lender requested a letter of explanation. “So, what?”

For a home loan, lenders will go through your financial records. Depending on your bank statements or credit report, further evidence may be necessary. You may be asked to prepare a “letter of explanation” while applying for a job. There is no need to be alarmed. The vast majority of the time, they’re completely unharmful. Be aware that this letter might have a significant impact on your ability to get a loan. Here’s how to draft an effective letter of explanation.

What is a mortgage explainer letter?

Lenders often seek letters of explanation (LOE or LOX) to learn more about a mortgage borrower’s condition. An LOX is required when a loan application has inconsistencies, omissions, or ambiguous

If any red flags arise throughout the underwriting process, such as:

  • Declining income
  • Gaps in your employment history
  • Differing names on your credit report
  • Enormous depo in your savings
  • Inquiries into my credit history
  • An error in your credit report’s address information.
  • Items that reflect poorly on your credit history
  • Defaulting on a credit card bill or other financial obligation
  • A bank account’s overdraft costs

A LOX may also be sought in other instances. ASK YOUR LOAN OFFICER IF YOU NEED TO WRITE ONE.

How to send a mortgage lender an explanation letter

Less is more when it comes to mortgage letters of explanation. Unnecessary information may cause misunderstanding or at least extra questions regarding your file, questions that may have been avoided if your message had been more specific.

The following should be included in your letter of explanation:

  • Be truthful. Never draft a letter only to please your lender.
  •  No part of your letter should be made up. Include the right dates, quantities, and any other relevant information.
  • How and when the circumstance that led to specific occurrences was remedied is important to your lender. Ex: if you were furloughed but have now returned to full employment, bring your recent pay stubs and have your employer certify that you will continue to work full time in the near future.

Acknowledgment – Don’t leave this out of your letter. Mortgage underwriters want to know what occurred and how it won’t happen again.

Ensure that you understand what you’re signing when you write a letter of explanation. Remember spelling, grammar, and punctuation. Visually beautiful, well-structured, and informative letters are a plus. Including supporting documents may assist. For example, if hospitalization caused several late payments on your credit record, medical bills may be useful.

Advice on drafting an explanatory letter

When you apply for a mortgage loan, you’ll be asked for bank statements, tax returns, and pay stubs. Your lender may ask you to write an explanation letter. When asked for an explanation letter, many first-time home buyers think their mortgage application is doomed. Don’t forget that this is a common request. Before approving your application, the underwriter may ask for this last thing.

Don’t panic if your mortgage lender asks for a letter of explanation. The next step is to check with your lender to find out exactly what is being asked. Then, write a letter to the person without any emotional language, anger, or information that isn’t necessary. When you talk to your lender again, they’ll probably tell you that you’ve been fully approved.

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