A letter of explanation can keep your mortgage approval moving forward if something unexpected happens to your finances.
Occasionally, a lender will need specific details clarified before you qualify for a mortgage. That’s when something as simple as writing a letter comes into play.
What is a Letter of Explanation?
A letter of explanation (LOX) is a brief document sent to lenders to clarify things like an insufficient-funds charge on your checking account, to note changes in income, provide a summary of your rental history, or just about anything that could be called into question during the mortgage approval process.
How does a letter of explanation work?
When underwriters prepare to approve a loan for a bank, they’ll review any documents you’ve sent with your loan application, such as tax records and W-2s. If they have any questions, or if any information appears to be missing, the underwriter may request an explanation so you can fill in missing details. Lenders will hold on to any LOX they receive in case the loan ever needs to be reviewed, as incomplete files can result in penalties for the bank.
For example, let’s say you sell a vehicle privately, and there’s a large deposit from the transaction appearing on your bank statement. When reviewing your mortgage application, a loan officer may need to confirm what that deposit was — they want to ensure that you’re not borrowing money to use for a down payment. You’d need to provide a LOX describing the deposit as a legal statement for the lender’s records.
Letters of explanation can also be used to clear up any conflicting information in your credit report, like an incorrect address or employer (even though the best tactic is to correct credit errors before starting the loan process). They give you a chance to explain why you had to make a late payment on another bill, or why there’s an overdraft fee on your bank statement.
Letter of explanation template example:
Writing a LOX is typically simple. Be sure to date it, explain the issue you’re addressing, and include as much detail as you can. And of course, be sure to sign the letter. Here’s a sample explanation letter:
April 29, 2016
To whom it may concern:
Here is the explanation requested in regard to my mortgage application (application number ###). The $2,000 deposited to my bank account on February 9, 2016, was received for the sale of my 2004 Honda Civic to John Johnson on February 6, 2016. I no longer have a receipt for the transaction.
Your Signature Here