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Introduction
When it comes to applying for a mortgage, there are a lot of moving parts involved.
One of those parts is the letter of explanation. This is a document that you may need to provide to your lender, and it serves to clarify any issues or discrepancies in your financial history that may affect your mortgage application.
In this blog post, we will explore what a letter of explanation is, why it is important, and what you should include in one.
What is a letter of explanation?
A letter of explanation sometimes referred to as a LOX, is a written statement that you provide to your mortgage lender.
This statement is meant to clarify any issues or discrepancies that may arise during the underwriting process.
Underwriters are responsible for reviewing your mortgage application and making sure that you meet all of the lender’s guidelines and criteria.
If they come across something in your financial history that they don’t understand or that raises a red flag, they may ask for a letter of explanation.
Some common reasons why an underwriter may ask for a letter of explanation include:
- Gaps in employment history
- Recent job changes
- Large deposits in your bank account that are not related to your regular income
- Late payments on bills or other debts
- Past bankruptcies, foreclosures, or other financial problems
- Nontraditional credit history, such as a lack of credit history or a reliance on alternative forms of credit, like rent payments or utility bills
Why is a letter of explanation important?
A letter of explanation is important for a few reasons. First, it shows that you are proactive and transparent about your financial history.
If there are issues or discrepancies in your financial history that may raise concerns for the underwriter, it’s better to address them upfront rather than waiting for the underwriter to ask for clarification.
By providing a letter of explanation, you are demonstrating that you are taking your mortgage application seriously and that you are willing to work with your lender to ensure that your application is successful.
Second, a letter of explanation can help mitigate any concerns that the underwriter may have about your financial history.
If, for example, you have a gap in your employment history because you were laid off from your job, providing a letter of explanation that details why you were laid off and what you did to address the situation (such as taking classes or volunteering) can help show the underwriter that you are a responsible borrower who is capable of handling a mortgage.
Finally, a letter of explanation can help speed up the underwriting process. If the underwriter has to ask for clarification on certain aspects of your financial history, it can delay the process of approving your mortgage application.
By providing a letter of explanation upfront, you can help ensure that the underwriter has all of the information they need to decide on your application on time.
What should you include in a letter of explanation?
If you are asked to provide a letter of explanation, there are a few key things that you should include.
First, be sure to address the specific issue or discrepancy that the underwriter is asking about.
For example, if they are asking about a gap in your employment history, provide details about why you were not working during that time and what you did to address the situation.
If they are asking about a large deposit in your bank account, explain where the money came from and why it is not related to your regular income.
Second, be clear and concise in your explanation. You don’t need to provide a lot of unnecessary detail, but you do want to make sure that the underwriter has a clear understanding of what happened and why.
Use plain language and avoid technical jargon or acronyms that the underwriter may not be familiar with.
Conclusion
A letter of explanation is an important part of the mortgage application process.
It provides an opportunity for you to explain any unusual or adverse circumstances in your financial history and to provide additional. information that may help your lender to better understand your situation
