Your lender has requested a letter of explanation. And now?
When you apply for a home loan, your lender looks at your financial history. Depending on what it finds in your bank statements or your credit report, additional documents may be needed.
You may be asked for a “letter of explanation” during the application process. Do not be afraid. Explanation letters are pretty standard and nothing to worry about.
However, you want to make sure you write this letter correctly, as it could be crucial for your mortgage approval.
Here’s everything you need to know so you can hit a home run with your cover letter.
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What is a mortgage letter of explanation?
Commonly known as “LOE” or “LOX”, letters of explanation are often requested by lenders to obtain more specific information about a mortgage borrower and their situation.
A LOX may be necessary when there is inconsistent, incomplete, or unclear information about a loan application.
Letters of explanation may be required if warning signs arise during the subscription process, such as:
- Decreased income
- Gaps in your employment history
- Different names on your credit report
- Large deposits or withdrawals from your bank account
- Recent credit inquiries
- An address error on your credit report
- Deviating items in your credit history
- Late payments on credit cards or other debts
- Overdraft charges on an account
There are many other situations in which a LOX can also be requested.
If you need to write one, be sure to ask your loan officer what exactly the underwriter wants to see and if you need to provide any supporting documentation with the letter.
How to write a letter of explanation for your mortgage lender
When it comes to mortgage cover letters, less is usually more.
Too much unnecessary information can lead to confusion or, at a minimum, additional questions about your case, questions that could have been avoided without certain details in your letter.
The most important elements of your cover letter 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 don’t have to fabricate any aspect of your letter. 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 put on leave during COVID, but have since returned to full employment, you should be able to document your recent payslips and have your employer verify that you will continue to work on time. full for the foreseeable future.
- Recognition – This is important and should not be overlooked in your letter. Mortgage underwriters want to know why something happened and how or why it won’t happen again in the future
Remember that a letter of explanation is a professional document that will fit into your loan file.
Pay attention to things like spelling, grammar, and punctuation. Create a visually appealing letter that is properly formatted and communicates relevant information.
It may be helpful to provide additional documentation with your letter. For example, if hospitalization is the cause of some missed payments on your credit report, it may be helpful to include hospital bills.
Explanation letter template and model
Remember to be honest, formal and concise when writing a cover letter for your mortgage lender.
The exact content will vary depending on your situation, but here is a general letter template you can use as a guide. (Click on the image to open a PDF version.)
Remember to include your mailing address, phone number, and mortgage application number (or the address of the property you are applying for).
Final tip on writing a letter of explanation
You will be asked to submit a stack of documents during the mortgage process, including bank statements, tax returns, pay stubs, and more.
Depending on your financial situation, your lender may also request a letter of explanation. Many first-time homebuyers believe being asked for a letter of explanation means their mortgage application may be unsuccessful.
Remember that this type of request is usually a good thing. The underwriter can research this last item before signing your final approval.
When your lender asks for a mortgage cover letter, remember this first: don’t panic.
Then check with your lender what exactly is being requested.
Then write a letter that is clear and concise, free from emotional language, negativity, or excessive detail. Chances are, the next time you hear from your lender, it will be to let you know that you are fully approved.
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