Your lender asked for a letter of explanation. What now?
When you apply for a home loan, your lender will do a deep dive into your financial history. Depending on what it finds in your bank statements or credit report, additional documentation may be necessary.
You may be asked for a “letter of explanation” during the application process. Fear not. Letters of explanation are fairly standard and nothing to worry about.
However, you want to make sure you write this letter correctly, as it could be crucial to your mortgage approval.
Here’s everything you need to know so you can hit a home run with your letter of explanation.
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What is a mortgage letter of explanation?
Commonly referred to as an ‘LOE’ or ‘LOX,’ letters of explanation are often requested by lenders to gain more specific information on a mortgage borrower and their situation.
An LOX can necessary when there is inconsistent, incomplete, or unclear information on a loan application.
Letters of explanation may be required if any red flags turn up during the underwriting process, such as:
- Declining income
- Gaps in your employment history
- Differing names on your credit report
- Large deposits or withdrawals in your bank account
- Recent credit inquiries
- An address discrepancy on your credit report
- Derogatory items in your credit history
- Late payments on credit cards or other debts
- Overdraft fees on an account
There are many other situations where an LOX may be requested, too.
If you need to write one, be sure to ask your loan officer what exactly the underwriter wants to see, and whether you need to provide any supporting documentation along with the letter.
How to write a letter of explanation for your mortgage lender
When it comes to mortgage letters of explanation, less is typically more.
Too much unnecessary information may lead to confusion, or at minimum, additional questions about your file — questions that may have been avoided if it weren’t for some of the details in your letter.
The most important elements of your letter of explanation should include the following:
- Facts — Be honest. Never be tempted to write a letter based on solely on what you may think your lender wants to hear. You shouldn’t fabricate any aspect of your letter. Include correct dates, dollar amounts, and any other pertinent details for your situation
- Resolution — Your lender wants to know how and when the situation that led up to certain events was resolved. For instance, if you were temporarily furloughed during COVID, but you’ve since returned to full employment, you should be able to document your recent paystubs and have your employer verify that you’ll continue working full time for the foreseeable future
- Acknowledgement — This one is important and shouldn’t be left out of your letter. Mortgage underwriters want to know why it is that something happened, and how or why it won’t happen again in the future
Remember that a letter of explanation is a professional document that will go into your loan file.
Be mindful of things like spelling, grammar, and punctuation. Create a letter that’s visually appealing, properly formatted, and communicates the relevant information.
Providing additional documentation with your letter can be helpful. For example, if hospitalization was the culprit behind some missed payments on your credit report, it may be helpful to include hospital bills.
Sample letter of explanation and template
Remember to be honest, formal, and concise when writing a letter of explanation for your mortgage lender.
The exact content will vary based on your situation, but here’s a general letter template you can use as a guide. (Click the image to open a PDF version.)
Remember to include your mailing address, phone number, and the number of your mortgage loan application (or the property address for which you’re applying).
Final advice on writing a letter of explanation
You’ll be asked to submit a pile of documentation during the mortgage loan process, including bank statements, tax returns, pay stubs, and more.
Depending on your financial situation, your lender may also request a letter of explanation. Many first-time home buyers think being asked to provide a letter of explanation means their mortgage application may be doomed.
Remember, this type of request is usually a good thing. The underwriter may be looking for this last item before signing off on your final approval.
When your lender requests a mortgage letter of explanation, remember this first: don’t panic.
Next, double-check with your lender on exactly what is being requested.
Then write a clear, concise letter that’s free of emotional language, negativity, or excessive detail. There’s a good chance that the next time you hear from your lender, it will be to let you know you’re fully approved.
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How to improve your credit score in 2021: Easy and effective tips
If you’ve ever wondered “What is my credit score?” it’s probably time to find out. Having a good credit score can make life a lot more affordable. If you’re about to buy a house or car, for example, the higher your credit score is, the lower your interest rate (and therefore, monthly cost) will probably be.
Your number may also be the deciding factor for whether or not you can get a loan and ultimately determine if you are even able to buy something you want or need.
So, yes, the goal is to have the highest possible credit score you can, but increasing the number doesn’t just happen overnight. There are important steps to take if you want to increase your score, and the sooner you start working on it, the better.
“If you’re trying to increase (your credit score) substantially to accomplish a goal, you’re really going to have to have as much lead time as possible,” said Thomas Nitzsche, director of media and brand at Money Management International, a nonprofit financial counseling and education provider that advises people on how to legally and ethically improve their credit score on their own.
If you have fair credit and you’re trying to improve the number for a house purchase, for instance, you’ll want to start working on it at least a year in advance, he explained to TMRW.
But even though that sounds like a long time away, you can (and should!) start doing things right now to bump that number up. Below, see seven things you should do — and not do — to help improve your credit score:
1. Review your credit report
The first thing you’ll want to do is pull up a copy of your current report so you know where you stand. You can get free reports from all three agencies — TransUnion, Experian, and Equifax — at annualcreditreport.com. Nitzsche said it’s important to take a moment and understand the financial snapshot of where you are today and where you want to be.
You’ll also want to take some time and look for any errors on your report, which could negatively impact your score. “If your name is misspelled, that’s not going to hurt your score,” he explained. “But if you see a late payment or missed payment (that’s in error), or maybe you have an account that should be reporting but isn’t, then that’s a problem and that will impact your score.”
If there is an error, you should dispute it and try to provide as much proof as you can.
One other thing: You can also ask a creditor to remove an issue if it’s been corrected (i.e., if you paid off a collection debt). Nitzsche said it doesn’t hurt to ask and the worst thing they could say is no.
2. Have good financial habits
“The biggest part of your credit score is payment history, so the most critical thing is never missing a due date,” Nitzsche said. Set up a monthly autopay or add all due dates to your calendar so you never miss a bill.
You can also achieve a higher score when you mix different types of accounts on your credit report. It may seem counterintuitive to get extra points for having debt in the form of student loans, mortgages and auto loans, but as long as you’re paying them off responsibly, it shows that you’re reliable.
3. Aim to use 30% or less of your credit at any given time
Know your credit card limit, and try not to use any more than 30% of that number each month, otherwise your score could lose points for too much credit utilization.
Another thing you can do is ask your bank to increase your limit. “That will give you more flexibility to spend more,” Nitzsche said. You could also pay it off twice a month to keep the balance low. But he does warn that you never know when the balance is going to be reported to the bureau. It can happen at any point during the month, so it might be the day after you make the payment or the day before. “You don’t necessarily want to use the card and pay it the next day because that doesn’t give the bureau the chance to know that you’re using it,” he said.
4. Avoid requests for new credit
If you’re looking to increase your score around the time you want to buy a house or car, you won’t want to open up a new line of credit, like a retail card, credit card or loan. That’s because “hard” credit inquiries like those can lower your score, and sometimes it comes down to a few points over whether you’re approved or what your rate will be, Nitzsche said.
“Soft” credit inquiries, like when an employer checks your credit or when you pull your own report, won’t affect your score.
5. Keep all accounts open, even ones you don’t use anymore
Even if you don’t use that credit card from college, it’s a good idea to just keep it open because closing it could hurt your score. Nitzsche explained that you’ll be dinged some points for each account that is closed. If you want or need to mentally break up with a card, just cut it up instead.
6. Build your credit if needed
If you haven’t established credit yet, you might not even exist … in the credit report space, that is! “If someone has never fallen in delinquency on any subscriptions or utilities or never had collections on anything and they have not utilized credit cards or loans in the past seven to 10 years, they may not have a credit profile at all,” Nitzsche said. “That presents a challenge when you want to buy a home.”
If this sounds familiar, you may have to get a secured credit card where you put down a deposit, he advised. “You still have to make payments and use it responsibly. Not all banks offer them but you can usually check with your local bank or credit union.”
7. Reach out for help
There are many apps and credit-monitoring services that can help you stay on top of your credit score. You could also reach out to a professional credit counselor who can help you navigate your specific situation. (Here’s a good resource about finding a reputable service.)
One last thing: Nitzsche warned that everyone should beware of credit repair scams that claim to be able to increase credit scores for an advance fee to get accurate negative information removed (even temporarily) from credit reports.
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