Letter of Explanation To Underwriters For Mortgage
In this blog, we will cover and discuss how to write a letter of explanation to underwriters during the mortgage process. Borrowers who are either buying a home or homeowners who are refinancing their home loan go through the mortgage process by completing and submitting a mortgage application called 1003. Completing a mortgage application officially starts the mortgage process.
Why Do Lenders Ask For a Letter of Explanation To Underwriters During the Mortgage Process?
The mortgage application, also known as 1003, asks for information about income, debts, and assets. It also asks for disclosures such as if the borrower filed bankruptcy, had a foreclosure, had a judgment, had tax liens, or short sale.
It is of utmost importance that mortgage applicants answer these questions as accurately and truthfully as possible. All information stated on the mortgage application will be verified. A letter of explanation to underwriters will need to submit on matters mortgage underwriters need clarification.
Documents Required To Process Mortgage
Prior to processing and underwriting your mortgage loan application, the loan officer will ask borrowers to provide financial documents such as the following:
- Two-years tax returns
- 2 months’ bank statements
- W-2s for the past two years
- 30 days most recent paycheck stubs
- Bankruptcy papers if it applies
- Foreclosure papers if it applies
- Divorce decree
- Other documents such as judgment release and tax release paperwork.
Mortgage Processing
Once these documents are submitted, the loan officer will then start the mortgage process. The mortgage loan application will be assigned a mortgage processor and prepared for underwriting.
Once the mortgage processor makes sure that all documents are complete with no missing pages, the loan will be submitted to the lender’s underwriting department. It will then be assigned a mortgage underwriter.
Mortgage Underwriting
It is the job of the underwriter to approve a mortgage loan. Underwriters issue conditional mortgage loan approvals. Mortgage Underwriters issue clear to close.
The mortgage application and the document submitted along with credit reports are reviewed by mortgage underwriters. The mortgage underwriter fully understands credit and financial profiles and any questions. A letter of explanation to underwriters needs to be submitted.
How Underwriters Analyze and Look at Mortgage Files
Once a mortgage loan application is assigned to an underwriter, the underwriter will get through the mortgage application, credit reports, and all of the documents submitted. The mortgage loan underwriter will review 2 years’ tax returns. The tax returns will need to be verified with the Internal Revenue Service through 4506T. The underwriter will review W-2s. Will want to see a verification of employment letter from the current employer.
What Do Mortgage Underwriters Look For?
The underwriter will also check bank statements. See if there are any overdrafts in checking or savings account in the past 12 months. The mortgage underwriter will also review bankruptcy papers for borrowers who filed a prior bankruptcy.
Underwriters will also review derogatory items on the credit report. See the patterns of credit history. The mortgage underwriter will assess the risk level. If he or she believes whether borrowers will pay future mortgage payments. The mortgage underwriter will then issue you a conditional mortgage loan approval
Common Type of Letter of Explanation To Underwriters
Prior to issuing a conditional approval, you may be required to write a letter of explanation to underwriters for questionable items”. The letter of explanation to underwriters needs to be brief. Needs to be to the point. A wrong statement can blow the deal. The mortgage broker will help write the letter of explanation and review it prior to submitting it.
Typical Requests For LOX
Some examples of the type of letter of explanation to underwriters that are common are the following:
- For borrowers who have unsatisfied collection accounts, mortgage underwriters will want to explain why the account went into arrears and the debt has not been paid
- Some valid reasons can be the loss of a job, divorce, medical issues, identity theft, or other unforeseen circumstances
- For borrowers who had a bankruptcy and/or foreclosure, the underwriter will want to know a letter of explanation on why they filed bankruptcy or went through foreclosure
- Some reasons can be due to the loss of a job, closure of business, medical issues, or divorce
- Too many credit inquiries
- Every credit inquiry within the past 90 days
Response to a Letter of Explanation To Underwriters
Borrowers will be asked to respond with a letter of explanation to underwriters for one or more of the following conditions below if it applies to them. As mentioned earlier, the response should be short and to the point. Remember there is no right or wrong answer. Mortgage underwriters do not care too much about what is said in a letter of explanation to underwriters. They just need to make sure they have it and is put in the file. Here is some short-to-point verbiage that can be on a letter of explanation to underwriters:
- Some reasons for multiple credit inquiries from mortgage companies can be shopping for a mortgage
- Response for multiple credit inquiries from creditors can be shopping for a lower interest rate credit card
- Or some other reasonable explanation where it will prove to the underwriter that the borrower was not desperately seeking new credit due to financial troubles
Why Do Lenders Ask For a Letter of Explanation To Underwriters?
The main reason for underwriters asking for a letter of explanation to underwriters is the underwriter wants to know if there is no new debt incurred during the mortgage process. Self-employed individuals might need to prove that their business is most likely to continue via a letter of explanation to underwriters. Job gaps in the past two years need to be addressed. A letter of explanation to underwriters will need to be submitted if borrowers had job gaps in the past two years or periods of unemployment. Declining income needs to be explained.
Clearing Conditions For a Clear To Close
Once mortgage loan applicants have supplied a letter of explanation to underwriters, they will be issued conditional approval. There will be conditions that should easily be satisfied. Such conditions may be insurance information, the most recent bank statements, the most recent paycheck stubs, and pulling a current credit check on you and/or co-borrowers.
How Long Does It Take For a Clear To Close For a Mortgage?
Once these terms have been satisfied, the mortgage underwriter will issue a clear to close which is the clear go-ahead to schedule closing.
For more information on this blog or other topics, please contact us at Non-QM Mortgage Brokers at 800-900-8569 or text us for faster response. Or email us at gcho@gustancho.com. The team at Non-QM Mortgage Brokers, Inc. is available 7 days a week, on evenings, weekends, and holidays.
