How to Write a Letter of Explanation to Mortgage Underwriters

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A mortgage loan application goes through different stages prior to loan documents being delivered to the settlement agent. First, the applicant speaks with a loan officer who talks about employment and income, current debts and a general idea of a person’s credit history among other items. After the conversation, the loan officer will prequalify the applicant or if the applicant wants to take it a step further and receive a preapproval letter, third-party documentation needs to be submitted. Once the application has been completed including a new appraisal report, the file moves over to the mortgage company’s underwriter. The underwriter is the person responsible for making sure the loan and supporting documents follow the guidelines for the loan being applied for.

Once the loan arrives at the underwriter’s desk and is reviewed, the underwriter will likely have a few questions. Most questions will be minor while others not so much. When an underwriter has a question, the underwriter requests a Letter of Explanation, or LOE as loan officers refer to it. When an application goes into underwriting there will almost always be an LOE addressing something in the file. Even the best of loan files will have something that needs to be addressed. Sometimes though, borrowers automatically think the worst and mistakenly believe there’s something wrong and an approval looks doubtful. But in reality, the underwriter is just following proper underwriting protocol.

One of the more common requests relates to name changes or even misspellings on different documents. For example, a woman was recently married and took her husband’s last name. Instead of Jane Doe she’s now known as Jane Smith. When the lender accepts the application and ultimately heads to the underwriter, the underwriter will see two people on the credit report and different names on different documents. The underwriter will want something in the file explaining the name discrepancy even though it’s perfectly obvious what happened. But there’s no getting around the LOE. The underwriter will request that an AKA, or Also Known As document be included in the file and the borrower will write a letter that goes something like this:

To Whom It May Concern, or Dear Underwriter;

My maiden name was Jane Doe and got married and took my husband’s last name and today I am legally known as Jane Smith.

Sincerely,

Jane Smith

That’s it. It might seem a bit of a waste of time but the lender must follow loan guidelines and this procedure must be completed.

Here’s another common scenario. The loan application spells Jane’s name “Jayne” instead of Jane. Again, the underwriter will need an explanation letter in the file explaining they’re one and the same. Many times when information is reported to a credit agency there will be mistakes made. But whatever was submitted to the credit agency is what will be reported. The credit agency can also make a mistake and carry the misspelling.

To Whom It May Concern, or Dear Underwriter;

The correct spelling of my first name is Jayne. I do not know why there is a discrepancy.

Sincerely,

Jayne Smith

There really is no need to get too detailed with such a minor issue and while it may seem trivial it’s still going to trigger an LOE.

Okay, but what if the issue isn’t so minor? What if the underwriter needs more information about something in the credit report, bank statements or paycheck stubs? Let’s say there is a payment listed on the credit report more than 30 days past the due date. Borrowers may be unaware of the late payment but the credit report still reports the late pay. Again, considering the overall file, it’s still a minor issue but one that can’t be ignored.

To Whom It May Concern, or Dear Underwriter;

I was unaware of the payment being late and cannot recall why it would be listed so. I have always made my payments on time and apparently this was an oversight on my part.

Sincerely,

Jayne Smith

The LOE is fairly straightforward. Jayne didn’t know about the late payment but the rest of her credit profile is perfect. She said apparently it was an oversight and an isolated issue.

Here’s an LOE for something more important, a bankruptcy that was discharged three years ago.

To Whom It May Concern, or Dear Underwriter;

The bankruptcy filing and discharge was a combination of an extended illness in the family and lack of employment for several months. My husband is back in good health and has been back to work for full time for three years and expects to continue with his current job well into the future.

Sincerely,

Jayne Smith

What you see with this letter is an explanation that the bankruptcy filing was basically out of the borrower’s control, the issues that forced the bankruptcy, health and unemployment, are gone and not likely to recur. An LOE for a major issue needs to explain what happened and why as well as the corrective steps taken to make sure it doesn’t happen again.

If you receive a request for an LOE and not sure how to respond, simply ask your loan officer, explain the details and your loan officer can help craft a proper answer.

 

Contact Matt Herbolich NMLS#1649154 at The Gustan Cho Team at USA Mortgage for all of your Real Estate and Mortgage Questions at 888-900-1020 or email mherbolich@usa-mortgage.com

 

 

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