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The Letter of Explanation

Have you been asked by your mortgage lender during the underwriting process to write a letter of explanation (LOX) and don’t know where to begin?  You might have an overdraft fee on your bank account ( or NSF // non-sufficient funds), a late payment or two on your credit report, a different address on your bank statements than your current mailing address, or a deposit to your bank account that needs to be sourced.

Here’s the basic structure you can follow when crafting your LOX:

  1. Greeting and date
  2. Cite the incident with all applicable identifying information (date, last four numbers of the account number, institution/creditor)
  3. Explanation/solution/what has been done to improve the situation and prevent future occurrences
  4. If requested, supply appropriate documentation (cancelled checks, proof of payment, etc.)
  5. Closing

SAMPLE LETTER OF EXPLANATION:

4/29/2013

Re: Mortgage Application

Dear Sir or Madam:

Below are the explanations you have requested in regards to my mortgage application:

1)      Overdraft fee, 2/12/2013, Bank of the Universe, #3423

In February of this year, we encountered several unforeseen expenses including repair to our roof and new tires on both of our cars.  Several of the checks cleared on the same day, the day before our paychecks were directly deposited into our account.  We had the funds to cover the purchases in our savings account, but we simply weren’t tracking our checking account balance closely enough to transfer the funds in time.  This has never happened before, and we have since signed up for alerts to notify us when our balance drops below $xxx.xx.

2)      Deposit, $300.00, 3/7/2012, Bank of the Universe, #3423

The deposit referenced above were checks from my grandparents for my birthday.  I have provided copies of the cancelled check.

Sincerely,

Jane and Jon Househunters

The LOX is very common in today’s lending environment, so crafting a solid one is imperative.  You goal is to help the underwriter understand why you are a good candidate for a mortgage loan.  Always remember to be polite, concise, and honest.

If you are considering purchasing or refinancing in Richmond, VA, please contact me for a free mortgage consultation.  To stay informed, follow me on Twitter and like me on Facebook.

If you are interested in purchasing or refinancing in one of the states below, please contact me and I will be happy to connect you with one of my First Home Mortgage colleagues who is licensed in your state.

Maryland, Delaware, Connecticut, Florida, Georgia, Maine, Massachusetts, New Hampshire, New Jersey, North Carolina, Pennsylvania, Rhode Island, South Carolina, Washington D.C., or West Virginia.

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103 thoughts on “The Letter of Explanation

  1. Hi Whitney, we are currently going through the loan process. The underwriter says that we will get out commitment letter with provisions on it that stuff are paid off on the credit report. The issue is that 2 of these credit inquiries are reporting 2x each from other agencies of the same amount. My mortgage broker says he is going to write a letter explaining that this is happening. How often does this happen and normally does the letter justify it enough that we will have that provision taken off?

    • Hi, Kate, I think you mean that you have liabilities that are reporting multiple times on your report. If the numbers match up, this should be an easy fix for your loan officer to order a credit supplement to correct the report. I see this all of the time.

  2. Hi Kate I have two issues keeping me from getting approved. The first is my student loans. The student loan company has a form that shows what my estimated actual payment will be. My loan officer wants to know the exact amount. The student loan company keeps telling me it will be close to the estimated amount and that the loan officers should take that when they have clearly told me they can’t. My second issue is a charge off from 2009. I have written a letter explaining the charge off. Do you think it will be a big factor in keeping me from getting approved?

    • The loan officer should be able to use the estimated payment amount-I have used that before with underwriting. The charge off will depend on how it is read by automated underwriting based on your entire credit history.

  3. I am in the process of buying a house now. I had some trouble in the past paying student loans but for the past 15 months I have paid them, no problem. My credit is just where it needs to be to get a FHA loan. My husband is self employed and had some old student loan issues too. We pay them all now for over a year. My lender gave us a sheet to fill out explaining what happened. He says we will be fine but how much does student loans hurt from years ago?

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