It can be alarming when you receive a letter from the lender asking for clarification on some aspect of your mortgage application. However, this type of inquiry is common and is nothing to get anxious about. To find out more about dealing with a letter of explanation (LOE), read on.
Common Reasons for an LOE
In many cases, the lender needs to verify information such as:
- The lender wants to know why the bank imposed an extra fee on your account. This issue might arise when you had an overdraft or some other problem with your account. Depending on the reason the fee was charged, it could indicate that you had some error with your finances.
- They want to know more about a large deposit or withdrawal. If you received money, the lender wants to confirm that the money was not the result of a loan, which could add to your debt obligations. If you took out a lot of money, the lender might need to verify the reason for the withdrawal, particularly if you are expected to maintain a certain balance in the account for closing costs.
- Lenders will sometimes question late payments, foreclosures, bankruptcies, and any other negative entry on your credit report.
- If you have had a gap in your employment in the last few years, they may want to know why you were without income for that period.
How to Respond to the LOE
The lender is not expecting anything elaborate in a response letter. However, bear these considerations in mind:
- Answer as quickly as possible or your mortgage approval could be held up.
- Be as detailed as you can in your answers. Use dates, accurate dollar amounts, correct names, etc. when answering.
- If you are responding to negative issues, let the lender know what steps you've taken to ensure that it doesn't happen again. For instance, when explaining why you were late paying your student loan bill one month, explain that you were seriously ill at the time and missed the payment. Let the lender know that you set up automatic payments to that creditor so that it doesn't happen again.
Many of these inquiries are due to rules imposed on lenders by regulatory agencies or government-backed loan guarantee programs. The lender must do their part by inquiring about the issue. It does not mean that your loan is in jeopardy — far from it. These inquiries often come near the end of the underwriting process and can be signs that your loan is about to be approved.
Speak to your residential loan lender to find out more about the LOE.