The homebuying process is one that can be an enjoyable experience. Working side by side with your Real Estate Agent and Mortgage Broker can go smoothly towards achieving the goal of purchasing a home. When things don’t go as planned it can become stressful and possibly confusing, this is why choosing the best real estate professionals is vital to the first steps of a mortgage application.
During loan application, there are many things happening at once and underwriting is part of that process. Underwriting refers to the process that leads to a final loan approval or denial, which is determined by a professional underwriter. While many things have become automated in our world, an underwriter’s job is to read between the lines of automation for every application and make a final determination.
At times an underwriter may find that while all the required paperwork is in place and your credit score and Debt-to-Income ratio are all within acceptable standards, a “Letter of Explanation” can be requested. Ultimately, the quicker you can get them the answers they need, the faster you can get your home loan cleared to close.
What Are Some Of The Reasons I May Need To Provide A Letter of Explanation Or “LOE”
- Recently changed jobs
- Unusual deposit or withdrawal activity in your bank account
- Gap in employment history
- You have declining income
- Self-Employed borrowers may require a better explanation of income
- Additional liabilities have been noticed in bank statements
- Student Loans require more explanation or documentation
- Newly opened credit
- Additional addresses or names are showing on your credit report
- Previous payment delinquencies
- Fraud prevention
The one thing to keep in mind when it comes to a Letter of Explanation is that while they are not uncommon to run into… they are certainly not requested in EVERY case. Depending on your loan program, the lender involved, and even the specific person underwriting the loan your requirements before a clear to close will vary from case to case.
Commonly Occurring LOE Situations
There are however some more commonly seen requests and can easily be satisfied with little effort. Some of the more common requests stem from things like residency, large cash deposits, gaps in employment to name a few.
FOR EXAMPLE: Borrower Jessica has been employed for 8 years with the same employer, however, in 2017 she took a few granted months off from her employer to take care of a family member fresh out of surgery.
Because this scenario would create a gap in employment during the minimum 2 years of consistent work that most scenarios require, we would likely have to provide an LOE to the underwriter simply stating the exact story above.
Another potential request for a letter of explanation could come from bank statements. Let’s say you listed a single checking and savings account on your initial mortgage application, but shortly after applying you decided to deposit $500.00 from a third account you use on rare occasions. Because you didn’t intend on using this account and didn’t mention it during the application, the underwriters will want an explanation. In this case, a short statement on the scenario and updated bank statements can satisfy everyone involved.
The easiest way to avoid both of those scenarios is to tell your full story before the application is submitted.
How To Create A Letter Of Explanation
Luckily, creating an LOE can be quite simple. It is as easy as typing up a statement in word with the correct information included. You will want to make sure you include:
The foundation of the Letter of Explanation needs to have all the details necessary. If you spoke with someone other than your Loan Originator about this LOE request, make sure you discuss with them the proper details and potentially, supporting documentation needed to satisfy underwriting.
As stated before, the best thing to do is to have everything prepared prior to purchasing. If money needs to be deposited in large sums from an account that won’t be used for future closing costs… Deposit those funds 60+ days in advance. We covered the idea of opening new account during the mortgage process in a previous blog post, and as stated… JUST SAY NO!
Considering a new job? Pull the trigger early to allow for pay stubs and verification of employment to be in effect, or just wait until after closing.
I cannot say it enough that the best way to avoid all of these potential requests for a letter of explanation is to tell your whole story to your mortgage broker before application. Doing so will drastically decrease your chances of running into future issues that may be even greater than a simple LOE. During the entire mortgage application process, your Mortgage Loan Originator and their team are your best friends!