When working your way through the mortgage process, there are a large number of different documents that you will be asked to provide. The list can often seem never-ending. One of the more common documents that your mortgage lender may request is a letter of explanation (LOX).
What is a letter of explanation?
When deciding whether or not to approve you for a mortgage, the underwriter will take a close look at your financial history. Their investigation might include looking at your bank statements, retirement funds, tax returns, and pay stubs. If they come across anything that throws up a red flag or just doesn’t make sense, you will be asked to provide a letter of explanation so that they may better understand it. You will often have to provide additional supporting documentation alongside the LOX.
What might cause the underwriter to request a letter of explanation?
There is no set list that an underwriter will use to determine whether or not you will need to provide a letter of explanation. However, some of the more common reasons for requesting an explanation would include:
- Credit report issues such as an incorrect address or outdated employer info
- Large, unusual deposits into your checking account
- Unpaid bills or overdraft fees
- Lots of new addresses over a short period of time
What information should be on your letter of explanation?
As your mortgage agent, I will draft this letter for you to sign. In terms of content, the letter needs to be as detailed as possible. Provide dates, dollar amounts, names of any other parties involved, etc. If you have receipts, invoices, or other supporting documentation we will need to provide it. Put simply, the more info you can give the underwriter, the better.
A request for a letter of explanation is not a bad sign and does not mean that the lender does not want to business with you, so if you do receive a request there is no need to worry. If you are unsure about anything, don’t be afraid to ask plenty of questions. Remember, the lender wants to close the mortgage just as much as you do so they are there to help in any way that they possibly can.