Your lender has asked for a letter of explanation. What now?
When you apply for a home loan, your lender is going to dig deep into your financial history. Additional documentation may be required, depending on what is on your bank statement or credit report.
You may be asked for a "letter of explanation" during the application process. No fear. Statement letters are pretty standard and not a cause for concern.
However, you want to make sure that you are writing this letter correctly as it could be vital to your mortgage approval.
Here is everything you need to know so that you can hit a home run with your statement letter.
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What is a mortgage declaration?
Commonly referred to as "LOE" or "LOX", lenders are often asked to provide explanatory letters to obtain more detailed information about a mortgage borrower and their situation.
A LOX may be required if a loan application contains conflicting, incomplete or unclear information.
Explanatory letters may be required if red flags appear during the drawing process, such as:
- Falling income
- Gaps in your professional life
- Different names in your credit report
- Large deposits or withdrawals in your bank account
- Current loan inquiries
- An address mismatch in your credit report
- Derogatory items in your credit history
- Late payment on credit cards or other debts
- Overdraft fees on an account
There are many other situations in which a LOX can also be requested.
If you need to write one, ask your loan officer what exactly the insurer would like to see and if you need to provide additional documentation with the letter.
How to write a statement letter for your mortgage lender
When it comes to mortgage declarations, less is usually more.
Too much unnecessary information can lead to confusion or at least additional questions about your file – questions that without some detail in your letter might have been avoided.
The most important elements of your letter of explanation should contain the following:
- Facts – Be honest. Never be tempted to write a letter based only on what you think your lender would like to hear. You shouldn't fabricate any aspect of your letter. Provide the correct dates, dollar amounts, and any other relevant details for 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 on leave during COVID but have since returned to full employment, you should be able to document your most recent pay slips and have your employer confirm that you will continue to work full-time for the foreseeable future
- Knowledge – This is important and should not be missing from your letter. Mortgage lenders want to know why something happened and how or why it won't happen in the future
Remember that a letter of explanation is a professional document that will be included in your credit file.
Pay attention to things like spelling, grammar, and punctuation. Create a visually appealing letter that is properly formatted and communicates the relevant information.
It can be helpful to include additional documents with your letter. For example, if hospitalization was the culprit for some missed payments on your credit report, it may be helpful to include hospital bills.
Sample declaration letter and template
Remember to be honest, formal, and concise when writing a statement letter for your mortgage lender.
The exact content will vary depending on your situation, but here is a general letter template to use as a guide. (Click the image to open a PDF version.)
Be sure to include your mailing address, phone number, and the number of your mortgage loan application (or the real estate address you are applying for).
Final advice on writing a letter of explanation
During the mortgage loan process, you will be asked to submit a batch of documents including bank statements, tax returns, pay slips and more.
Depending on your financial situation, your lender may also request a letter of explanation. Many first-time home buyers think that their mortgage application may be doomed when asked for a statement letter.
Remember, this type of request is usually a good thing. The underwriter may look to this last point before giving your final approval.
If your lender asks for a mortgage statement, think about it first: don't panic.
Next, check with your lender exactly what is being requested.
Then write a clear, concise letter that is free of emotional language, negativity, or excessive detail. There is a good chance that the next time you hear from your lender, they will let you know that you are fully approved.
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