You found the perfect house, the right neighborhood, good schools, close to work, everything you are looking for in a home. You contact an agent, you apply for a mortgage. Youâ€™ve collected your paystubs, bank statements, and W2 information. The agent tells you the package has been submitted to underwriting for review.Â Two days or maybe even a week passes before you finally hear something back from the bank. The news is not good. Your file has been suspended and the underwriter needs a letter of explanation (LOE) for why youâ€¦â€¦(fill in the blank)
There are several situations that could cause the underwriter to request a letter of explanation from the borrower. Currently,Â one of the most common reason I ask for a LOE, is to clarify why borrowers are looking to purchase a primary residence that is in close proximity to a home the borrower already owns. Â Now that last sentence may already have you asking a tricky questionâ€¦ what is close proximity?
Close proximity is something that is usually left to underwriter descretion. Â Meaning, does the distance between the two properties make sense. If you are looking to purchase a home that is under 5 miles from your current home, that wonâ€™t make sense in many areas of the country. But if you live in manhattan, or San Francisco, 5 miles could be a completely different neighborhood. Â But if you live in Phoenix, or Las Vegas, it may not make as much sense.
One of the big reasons why this issue has been so comon lately is due to borrowers looking to buy and bail. Many underwriters will review the borrowerâ€™s credit report to see how much the borrower currently owes on their current mortgage. The underwriter will then do a zillow or trulia search to get a quick estimate on the value of the home.Â If it turns out you owe $340,500 on your current mortgage, and zillow is estimating your home value at $210,000, the underwriter is going to have some serious reservations about your intentions of the buying the new home.
So what do underwriters look for in a LOE regarding the purchase of a new property, when you currently own a property in the same area.Â Most of the LOE Iâ€™ve seen come back stating how the new home is larger, more rooms, more square footage, closer to family or work, and offer a better school district for the kids.Â These are the most common, but only the tip of the iceberg regarding all the reason Iâ€™ve seen over the past several years.Â I recently read one letter where the main reason for purchasing the new property was that is offered a larger backyard so the parents could buy a horse for their daughter.
How long should your letter be? Depending on your reasons for purchasing the home it could be several paragraphs. However, Iâ€™d recommend a full page as the max. Anything beyond that and the underwriter may begin to lose focus on your story and start wondering why you have so many issues.Â On the other end of the spectrum I haveÂ seen LOEâ€™s that barley consist of two or three sentences.Â These short letters donâ€™t inspire confidence and usually show a lack of effort or concern on the borrower part for the purchase of the home.
Overall, be honest with your LOE, if the purchase is important to you, and your reason for the purchase are legitimate it should show in your letter.Â