Just because your credit history might not be the best, there is always hope to get approved, and this comes in the form of a manual underwrite. This is when an underwriter physically looks at your file and a computer program isn’t giving you a Yes or No. When applying for a mortgage with a credit history that may include derogatory credit, bankruptcy, foreclosure, judgment, disputes, and other items that an underwriter might need clarification on, a letter of explanation or “LOX” may need to be provided. By definition, a letter of explanation is just exactly what it says it is, and it is an explanation of why certain items got on your report, and why they will not happen in the future.
Now, when putting together a letter of explanation, these need to be very concise, brief, and must get directly to the point. There is no need to tell your life story here because more than likely the underwriter isn’t going to read the entire thing. They need to know what happened, why it happened, and why it will not happen moving forward. In a scenario where you need to submit multiple letters of explanation please make sure you are only explaining the item that the LOX is for. There is also a risk for writing too much about a certain situation as it could open up a Pandora’s box for the underwriter. If you show to the underwriter that there are other questionable details in your LOX, they are required to look more into every detail that may affect their decision to approve your mortgage. If this happens to you, the underwriter will probably ask for even more letters of explanation to address the new information you offered up to them.
Let me give you an example of an underwriter going through your file and requesting a letter of explanation. If by chance the applicant has had a history of good credit and timely payments, then all of a sudden a period of late payments shows up, there will be a requirement for a letter of explanation. If the applicant filed for bankruptcy, no matter the chapter, a letter of explanation will need to be provided. In another situation, in terms of foreclosure, deed in lieu of foreclosure, or short sale the reasoning can easily be that the applicant had an ARM (adjustable rate mortgage) or balloon mortgage and when the adjustment period hit, the significantly higher payment could not be afforded at the time. These exact reasons are very common prior to the housing collapse where sub prime mortgage lenders gave home buyers teaser interest rates (rates significantly lower than their fully indexed rates per the details on the loan) and when the true rate set in, their payment would double and was no longer affordable. Now when describing this time in your credit, the one thing that you must not say is that you couldn’t afford the home any longer and you just decided to let the house go and wait until the foreclosure finalized. This looks extremely bad on you as the borrower, and almost 100% of the time this will result in a loan denial.
Finally, the best thing you can do for yourself when submitting these letters of explanation is to give documentation that shows why things had happened, and how your situation has changed currently for the better. The stronger the case you can make sure yourself, the better the chance you will get an approval from the underwriter. Just remember that you need to be concise, brief, and have all your documentation submitted when creating these letters of explanation, they are the difference between purchasing a house and getting denied. If you need help with these items or any other mortgage related issues, please feel free to call me anytime at 888-900-1020 or email me at email@example.com.