During the mortgage loan process, your lender may ask you for a letter of explanation (also known as an LOE or a LOX). This is usually requested when further explanation is needed to address something on your credit report, an extenuating circumstance, or some other event. A well-written letter of explanation can improve your chances of mortgage approval, so take your time and prepare your letter well.
To write a thorough and effective letter of explanation, do the following:
- Check carefully for accuracy. Make sure all dates, names, details, and other references mentioned in your letter are accurate. If you make a statement, be prepared to back it up with supporting documentation. Your lender might come back and ask for it!
- Neatly handwrite your letter or type it out. Your letter should be legible. Do not assume the body of an email will suffice. Ask your lender if they will accept an email from you. In many cases, a letter of explanation is required to be signed and dated, so an email alone may not be acceptable. Don’t forget to use grammar and spell-check tools!
- Include your name, the address of the property you are financing, and the reason you are writing the letter. This basic information helps tie your letter back to your loan application.
- Make sure the body of the letter is well-organized and easy to understand. Let’s say you are writing about a credit issue. Organize information about late payments around the event that caused the lateness. Address every individual late payment in your letter rather than lumping them together in a generalized statement. Include the dates listed on the credit report, the creditor’s name, and an explanation of why delinquency happened. If you have any proof to back up your explanation, then it should be included, too. For example, if you had an accident at work and were unable to work for two months, you might include copies of worker’s compensation claim forms. This helps to show the problem is now over and it will not happen again. Your lender wants to see reasons that were beyond your control to dispel doubts that problems were caused by an inability to handle debt properly.
- If you have recently applied for new credit and are being asked to provide an explanation about the credit inquiry, clarify when you applied for new credit, why you applied for new credit, and whether the credit application resulted in the newly acquired debt. Newly acquired debt may not show up on your credit report right away. That’s why your lender is asking for an explanation. Provide your mortgage lender with the total balance of what is owed, the minimum monthly payment that is required, and a copy of any loan agreement or your most recent monthly statement.
- In the conclusion of your letter, summarize why you are a good credit risk and why the loan should be approved. Consider ending your letter by summarizing 1) why something happened, 2) what you did to resolve it, and 3) why it won’t happen again. Highlight steps you have taken to prevent future mishaps such as saving a few months’ reserves to handle the unexpected.
- Sign your letter using your legal name as stated on your loan application, then date it.
If you have any questions or need help writing your letter of explanation, reach out to either your mortgage loan officer or loan processor. They can guide you properly.
Jennifer Goldsby, NMLS #591226 | VP, Renovation Lending
Diamond Residential Mortgage Corporation NMLS #186805 | Equal Housing Opportunity
Disclaimer: The postings here reflect my personal opinion. They do not necessarily represent the opinions of Diamond Residential Mortgage Corporation and its management.
