There are many times that a Letter Of Explanation (LOX or LOE) is required while obtaining a mortgage loan.When using bank statements, be prepared to write a LOE for any unusually large deposits or other abnormalities with a particular statement like insufficient funds notices, etc.
Sometimes a Letter of Explanation is necessary if there isn't a certain paper trail leading to specific documented information.
A letter of explanation can be necessary for many reasons. One example as to why and what a letter of explanation may be needed for is if you had some slow pays, late payments, or past due amounts showing on your credit report. The lender or underwriter may require a letter of explanation from the borrower explaining the reason for the credit delinquencies.
Any Letter of Explanation (LOE) should be as simple and short as possible. If one is required your mortgage professional will tell you, and based on what the explanation they should be able to help you with the letter.
Sometimes an underwriter will ask for a Letter of Explanation to explain why there are multiple inquiries on the credit report. In other words they can see on a credit report how many times the credit was pulled in the last 12 months. They are sometimes concerned with pulls in the last 30 days because if a new account was opened (credit card, auto loan etc...) it will not be reporting the new liability on the credit report yet. So this Letter of Explanation should say that there have not been any new accounts opened in the last 60 days that are not reporting on credit.
On a Cash-Out Refinance, many times the lender will ask for a Letter of Explanation explaining what you, the borrower, plan on doing with the cash-out.
When a person is buying a new primary residence, and already owns a primary home, he may be asked to write a Letter of Explanation explaining what he plans on doing with his current residence (ie. selling it or keeping it as an investment property etc...).
Sometimes a Letter of Explanation is needed to explain any gaps in employment.
If you are able to refinance your way out of foreclosure, very often the lenders who fund these types of loans will require you to write a Letter of Explanation explaining the hardships that got you into this sitiuation and why it won't happen again.
There are times when the underwriters request for a Letter of Explanation will be to explain something that may seem obvious.
For example: I have seen an underwriter ask for a Letter of Explanation to explain why the amount of the borrowers paycheck was slightly higher than the amount deposited in his bank account. While many people only deposit a portion of their paycheck into their bank account, and keep some pocket money, the underwriter felt more comfortable having the borrower write this simple letter.
When a property that was recently listed "For Sale" on the Multiple Listing Service (MLS) and was removed so that the owners can refinance their mortgage, sometimes a Letter of Explanation is requested by the lender explaining why the house was taken off the market.
On a purchase transaction where there is no realtor involved, it is common for an underwriter to ask for a Letter of Explanation regarding this. The letter is used to clarify the relationship between buyer and seller. If the two parties are related in some way, this needs to be disclosed to the lender.
If you are asked for a Letter of Explanation to address the use of your cash out proceeds, know that the lender is trying to make sure that you are not going to use this money to go out and incur more debt, e.g. by using the money you just cashed out to make a downpayment on an investment property.
A relative giving a gift to a homebuyer may be asked to write a letter of explaining the funds are for the purchase of a home and do not have to be paid back.
Occasionally if two people are on a savings account together and only one of the two people is purchasing a home, an entitlement letter may be required. This will allow the underwriter to count those assets for the purchase of the home.
The main purpose of the LOE is to document a particular situation or event. That document then will be included in the file as it the loan will eventually be transferred to other investors on the secondary market.
