Written By: Frankie Lacy
Letters of Explanation (sometimes abbreviated to LOX or LOE) are a common condition on loan files. Underwriters request them to explain large deposits, residence histories, derogatory credit, credit inquiries, and much more. However, it is important to understand that in most cases, the LOX is just the beginning.
It is best to think of letters of explanation as a cover page used to tell the story of the file. They are meant to fill in gaps where traditional loan documents (such as the loan application, credit report, or income/asset docs) do not provide sufficient information. They are usually required in “one-off” cases where the loan characteristics fall into a gray area.
Need FHA Training? CLICK HERE: http://www.FHA-Classes.org
Because LOX’s are written by the borrower, it is common to see verbiage that, while heartwarming, does not satisfactorily speak to the issues on the loan. Furthermore, a lack of documentation submitted to support the comments in the LOX often leave the condition unsatisfied. Common statements I see are, “I take my credit very seriously and strive to pay my accounts on time” or, “I’m not sure how that inquiry got there.” These comments are very broad and generalized and do not provide sufficient detail for the underwriter’s credit decision.
We must begin to coach borrowers to provide all the details behind events in their credit history. For instance, if a borrower has derogatory credit, a sound explanation would be, “I have paid this account on time every month prior to the late and every month since. However, I was late on this account due to an oversight where I missed the payment in error. I have paid the account up to date as of __________.” Or they might say “I was laid off from ________ to _________. Attached is the letter from my previous job showing the date I was released. During this time, I depleted my savings while searching for a new job. As a result, I was late on the following accounts:_________. I am now re-employed and have brought all accounts up to date.”
If the item in question is a credit inquiry, and the borrower truly does not know where the inquiry originated from, they might say something like, “I have not inquired regarding any new debts, asset accounts, or insurance policies that would require a credit inquiry. The inquiries in question were pulled without my knowledge and outside of any attempt on my part to gain a credit account.”
Need FHA Training? CLICK HERE: http://www.FHA-Classes.org
More important than the wording of the LOX, is the supporting documentation submitted to support the story. For example, if a borrower is explaining an anomaly within their YTD earnings and their explanation is maternity or medical leave, they might provide something from their employer showing the leave was approved. Or if there was a large deposit made to an account, they should provide documents that source the deposit (copy of the check, etc.).
In this era of mortgage lending where the emphasis is on quality and compliance, we must learn to use LOX’s as a tool to strengthen the file. Used correctly, they can provide that extra “oomph” to your loan package that gets the deal sold to investors in a timely manner.
About The Author
Frankie Lacy - As an active NAMP® member and a NAMU®-CMMU designee, Ms. Frankie Lacy is a 13-year mortgage industry veteran with extensive conventional mortgage underwriting experience. Frankie is also a mortgage instructor for Mortgage Underwriter University (www.MortgageUnderwriter.org). Topics of Frankie's expertise include: Fannie Mae, Freddie Mac, USDA Rural Housing, underwriting to investor overlays, self-employed borrowers, personal and business tax return analysis, rental income, condos/co-ops/PUDs, and more. Frankie is a Davenport University graduate with a degree in Business Administration. If you're interested in becoming a writer for NAMP®, please email us at: contact@mortgageprocessor.org.
