Have you ever wondered why your mortgage lender is asking you to e-sign a letter that appears to be incredibly trivial on the surface or completely insignificant? Well, like many things in life, there are multiple reasons why a letter of explanation might be requested.
Ultimately, a letter of explanation (also known as an LOE or LOX for short) is requested to clarify any issues or discrepancies in the borrower’s financial history or mortgage application. These letters facilitate a loan application that might otherwise cause issues during the loan underwriting process.
We have listed some of the most common types of letters of explanation:
- Credit Inquiry Explanation – If you have any recent inquiries on your credit report prior to your mortgage application this will certainly come up. The reason for this is that lenders need to know if any debt was recently taken on that is not currently reporting on your credit report. If there is new debt not reporting this could have an impact on the loan and a statement would need to be provided to evidence the monthly payment amount and balance.
- Address discrepancy explanation – This is requested anytime account statements reflect a different address than the current physical residence address the borrower resides.
- Property association explanation – Your credit report lists a history of addresses which you have currently had associations with. If underwriting digs into these further and is unable to determine the reason the address popped up, they will ask for an explanation. In general, this is done to confirm there is no financial responsibility associated with the address in question.
- Derogatory or late payment explanation – Depending on the mortgage loan program underwriting will require an explanation for any accounts which are derogatory or have late payments. Oftentimes they are checking to make sure there was a valid reason and that they will not be expected to occur more in the future.
There are also numerous other letters of explanation that can be requested from the lender. While these letters of explanation may seem unnecessary at times, they are vital to the loan underwriting process. Oftentimes, a letter of explanation can help create continuity in a loan which allows you as the borrower to avoid having to track down difficult documentation.
If you have any questions about qualifying for a loan, feel free to contact our office to speak to a Mortgage Loan Originator at (760) 930-0569.
