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How To Write a Mortgage Letter of Explanation (With Template)

How To Write a Mortgage Letter of Explanation (With Template)
Rita Williams Contributor

When you apply for a mortgage, your lender’s underwriters take a close look at your finances — very closely. It’s their job to make sure you can afford your mortgage payments and to spot any red flags that indicate risk for your lender.

Sometimes they will ask for a mortgage letter of explanation if they see anything that raises questions, such as late payments or a large deposit into your bank account.

In this article, we’ll explain what a mortgage letter of explanation is and why you might be asked for one. We’ll also include a mortgage letter of explanation template you can use if your lender requests more information.

What's in this Article?

Why does a lender request a LOX?
What should you include in an LOX?
Downloadable mortgage letter of explanation template
Frequently Asked Questions

Why does a lender request a LOX?

Receiving a request for a mortgage letter of explanation (which is sometimes referred to as an LOX or LOE) might give you some anxiety, but this is actually a good thing. The LOX request is your chance to reassure your lender that you’re a qualified and responsible homebuyer.

“It is very common,” said Jeff Names, an Ohio-based loan officer with Fairway Independent Mortgage Corporation. “I even joke with people that they could use a crayon and write it on cardboard, as long as it is signed and dated.” 

In other words, don’t panic. 

“Every file typically has some sort of hurdle to overcome, and the LOX typically is the last piece to a puzzle,” Names said. 

Lenders must follow strict requirements from Fannie Mae and Freddie Mac, or in the case of government-backed loans, the relevant federal agencies, when it comes to proving a borrower’s ability to repay.

That’s why you have to submit tax returns, pay stubs, bank statements, and other financial documents when you apply for a mortgage. Your lender uses these to assess your finances and overall stability.

As the underwriters review your documents, they may have questions about your finances that they need to clear up before they approve the loan. Those questions may trigger a mortgage LOX request.

Related: What Does It Mean When a Mortgage File “Moves to Underwriting”?

Common reasons for an LOX

  • Overdrafts on your bank accounts: These can signal that you have difficulty managing money or are short on cash. Your letter should include an explanation of what happened and what you have done to ensure it will not happen again.
  • Late payments in your credit history: Your lender will want to know why these occurred and how you’ll avoid being late on your monthly mortgage payments 
  • Recent credit inquiries on your credit report: Multiple hard credit inquiries — especially for credit cards and auto loans — around the time you’re applying for a mortgage are red flags to lenders because it may appear you are taking on more debt
  • Bankruptcies, foreclosures, or other derogatory marks: Neither of these disqualifies you from qualifying for a mortgage. However, your lender will likely want to know the circumstances that led to a past bankruptcy or foreclosure, and how your situation has changed to avoid the same outcome on the new home loan
  • Employment gaps: A steady employment history is seen as a good indicator that you will have sufficient income to make your mortgage payments. Anytime there is a gap of 60 days or more, a lender may want to know what occurred and why
  • Large deposits: Your lender wants to ensure that you are not taking out an undisclosed second loan, whether from another lender or informally from a friend or relative, along with your mortgage, as that could change your debt-to-income ratio (DTI). If you received a large deposit as a gift toward a down payment, you will need to provide a gift letter from the person who gave you the money verifying that you do not need to repay it
  • Discrepancies in documentation: If the address you give doesn’t match your identification documents (such as a driver’s license), or if your application documents have multiple addresses, the lender will want to know why and will also need to verify your current address

What should you include in an LOX?

Your LOX should give your lender context for whatever they’ve asked about.

If it’s an employment gap, explain why you were out of work and reiterate your current employment status to reassure them that you earn a steady income.

Your LOX is an opportunity to bolster your application by providing a rational explanation for what happened and showing your lender that circumstances are different now.

Perhaps you have an overdraft on your transaction history because a purchase went through before your paycheck was directly deposited. Simply state that.

If your credit report shows missed payments from a couple of years back, tell them why you fell behind and how you’ll avoid a similar issue with your mortgage.

Your LOX is an opportunity to bolster your application by providing a rational explanation for what happened and showing your lender that circumstances are different now.

And remember, your loan officer is on your side. 

“Just be upfront and honest with the loan officer,” Names said. “We are here to help, and sometimes we need a little extra information to put together their story.”  

As you’ll see in the sample letter below, you’ll also want to include your name, mailing address, and phone number, even if you submit the letter electronically.

Is there anything you should not include in a mortgage letter of explanation?

Keep your mortgage LOX short and to the point. Answer your lender’s questions and leave it at that.

“[Borrowers] should answer specifically what the underwriter is asking for. Nothing more, nothing less,” Names said. “They should not include details that may raise more questions.” 

Emotional though you may be about the house you’re trying to buy or about your past financial situation, it’s best to focus strictly on the facts in your LOX. Your mortgage underwriter may be moved by more in-depth explanations, but they’re bound by loan program and lender guidelines. The best way to help yourself is to provide a clear and concise LOX that answers their questions and nothing more so they can continue moving you through the application process. 

And if you’re stressed or angry about being asked to provide the letter, leave that out as well. The underwriter is doing their job, and it’s in everyone’s interest to stay polite and courteous.  Besides, the sooner you provide the letter, the sooner you can get your clear to close.

Downloadable mortgage letter of explanation template

You can use this mortgage letter of explanation template if you’re asked to provide a LOX. Feel free to modify it as necessary based on your circumstances.

You can also download an editable Microsoft Word letter of explanation template here.

June 15, 2022

Mortgage Company

123 ABC Street

Any City, State Zip Code

RE: Your Name, Loan Number: 1234567, LOX for employment gap

To Whom It May Concern:

I am writing this in response to your request for a letter of explanation about the gap in my employment between March 2020 and June 2020. I was laid off from my job at XYZ Incorporated on March 10, 2020, due to a general staff reduction of 10%. The staff reduction was caused by a drop in orders at the company. I obtained my current position, at Mainstream Company, on June 1, 2020.

I have attached my W-2 forms and pay stubs as verification of my current employment. Please let me know if you require any further information.  I can be reached at (by email) or 415.555.1212 (by phone).


Your Name

Mortgage letter of explanation FAQs

How do I write a letter of explanation for a mortgage?

Your mortgage letter of explanation should address any issues your lender has asked you to clarify, such as missed payments, an employment gap, or a bankruptcy. Explain why the situation happened, how you corrected it, and how your financial situation has changed since that time.

Be sure to include your name, address, and phone number as well.

What is an LOX?

An LOX, or letter of explanation, explains to your lender why you had past financial difficulty. Sometimes, the lender needs to know the circumstances behind a past financial issue or the reason for a discrepancy in your financial documents. It’s an opportunity for you to explain issues that might concern your lender when you’ve applied for a home loan, such as a period of unemployment, a bankruptcy or foreclosure, or late or missed payments.

How do mortgage lenders explain overdraft fees?

Mortgage lenders don’t so much explain overdraft fees as see them as potential signs of financial difficulties. If they see overdraft fees on your bank statements, they may ask for a mortgage letter of explanation, which is a letter you submit explaining why the overdrafts happened. It’s a good idea to detail the steps you’ve taken to ensure overdrafts won’t happen in the future.

Final tips on writing a mortgage letter of explanation

A mortgage letter of explanation can be an important part of your mortgage application. Take time to write it clearly and succinctly, but don’t delay on writing and submitting. If your loan officer tells you that the underwriting team has asked for an LOX, respond in a timely manner because they won’t move forward with your loan until they get it.

Use the downloadable mortgage letter of explanation template above to get started. It’s a good idea to have a friend or family member proofread the letter before you send it. They may spot typos, grammar issues, or unclear phrases that you missed. You want to submit a professional, direct letter that inspires confidence in your lender to approve you for the loan.

Further Reading

Fairway Advantage Pre-Approval is the Key to a New Home

$15k First-time Homebuyer Tax Credit 2021: All Your Questions Answered