Your lender has asked for a letter of explanation. Now what?
When you apply for a home loan, your lender will dive deep into your financial history. Additional documentation may be required depending on what is on your bank statements or credit report.
You may be asked for an “explanatory letter” during the application process. Do not be afraid. The explanation emails are pretty standard and there is nothing to worry about.
However, you must make sure that you write this letter correctly, as it can be critical to your mortgage approval.
Here’s everything you need to know in order for your letter of explanation to be successful.
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What is a Mortgage Explanatory Letter?
Explanatory letters, usually called LOE or LOX, are often requested by lenders to get more specific information about the mortgage borrower and their situation.
LOX may be required when there is inconsistent, incomplete or unclear information in the loan application.
Letters of explanation may be required if any red flags appear during the underwriting process, such as:
- Decreased income
- Gaps in your employment history
- Different names on your credit report
- Large deposits or withdrawals in your bank account
- Recent loan requests
- Address mismatch on your credit report
- Offensive elements in your credit history
- Delayed credit card payments or other debts
- Overdraft fee on the account
There are many other situations where LOX may be required.
If you need to write it, be sure to ask your loan officer what exactly the underwriter wants to see and whether you need to provide supporting documentation along with the letter.
How to write an explanatory letter for a mortgage lender
When it comes to mortgage explanatory letters, less is usually better.
Too much unnecessary information can lead to confusion, or at least additional questions about your file – questions that could have been avoided if there weren’t some details in your email.
The most important elements of your letter of explanation should include the following:
- Facts – Be honest. Never be tempted to write a letter based solely on what you think your lender wants to hear. You must not falsify your letter. Please include the correct dates, dollar amounts, and any other details relevant to your situation.
- resolution – Your lender wants to know how and when the situation that led to certain events was resolved. For example, if you were temporarily laid off during COVID but have since returned to full-time employment, you should be able to document your recent pay stubs and ask your employer to confirm that you will continue to work full time for the foreseeable future.
- the confirmation – This is important and should not be overlooked. Mortgage insurers want to know why something happened and how and why it won’t happen again in the future.
Remember that an Explanation Letter is a professional document that will go down in your credit history.
Be mindful of things like spelling, grammar, and punctuation. Create a letter that is visually appealing, well-formatted, and conveys important information.
It may be helpful to provide additional documentation for your letter. For example, if hospitalization was the cause of some of the missed payments on your credit report, it might be helpful to include hospital bills.
Sample explanatory letter and template
Remember to be honest, formal, and concise when writing your explanation letter for your mortgage lender.
The exact content will depend on your situation, but here is a general email template that you can use as a guide. (Click the image to open the PDF version.)
Be sure to include your mailing address, telephone number, and mortgage application number (or the address of the property you are applying for).
Final tip for writing an explanatory letter
During the mortgage loan process, you will be asked to provide a bunch of paperwork, including bank statements, tax returns, payment receipts, and more.
Depending on your financial situation, your lender may also ask for a letter of explanation. Many home buyers think for the first time that asking for a letter of explanation means their mortgage application may be doomed.
Remember that this type of query is usually helpful. The underwriter may be looking for this last point before signing your final approval.
When your lender asks for a mortgage explanation letter, remember first: don’t panic.
Then double check with your lender as to exactly what is required.
Then write a clear and concise letter that is free of emotional expression, negativity, or excessive detail. There is a good chance that the next time you hear from your lender, they will let you know that you are fully approved.