If you are in the middle of a loan modification with your lender, your bank may ask you to write a letter of explanation (or LOE).
It can be frustrating to receive a request for an LOE because it will feel like the bank isn’t really paying attention to the specifics of your situation.
Unfortunately, this feeling is often correct.
At the beginning of the modification process, your file gets handled by front-end document reviewers who are not truly trying to understand what is going on. They are often undertrained and overworked and are trying to do as little work as possible.
When they see something that looks confusing, you can expect them to immediately mark your file incomplete and issue a request for an LOE.
The LOE request will keep your file in an incomplete status and prevent it from moving to the decision-making phase. Therefore, it’s important that you’re prepared for an LOE request and that you understand what the bank is asking you to do so you can quickly get them what they need to move the process forward.
4 Common Scenarios That Trigger an LOE Request:
You receive some sort of “irregular” pay on top of your wages
The most common types of irregular pay are things like commission, bonuses, and overtime. Any type of extra money you receive on top of base wages is considered “irregular” by the banks (even if you receive it regularly).
Typically, these types of payments are broken out on a pay stub and separated from your wages – this is what triggers the lender to have questions about your pay structure and ask for an LOE.
Solution: Tell them how often you receive the pay and whether it is reliable income.
Some bonuses and commissions are steady and consistent – meaning, you expect to earn the same amount every month. Some bonuses and commissions are dependent on job performance or seasonal sales. The lender is trying to determine whether the irregular pay is part of your consistent monthly income so they want you to explain the structure of the pay and whether it can be relied upon as a regular part of your household income.
Deposits over $500 showing on your bank statement(s) from an unclear source
A request for an LOE will come up if you have a deposit over $500 showing on your bank statement that does NOT come from the household income you reported.
Solution: Tell the bank what the deposit is for, where it comes from, and whether it comes into the household every month.
The bank is trying to determine if the deposit is a one-time, one-off deposit or a regular, monthly deposit.
If it’s a regular deposit, you can expect the bank to add the deposit to the household income.
You have not provided a required document that is part of the modification process because the document doesn’t exist
Most commonly, this applies to people who do not have a bank account and thus cannot provide bank statements or to people who have not filed taxes and cannot produce a tax return.
Tax returns and bank statements are part of the required document package for a modification, so if you can’t produce them – you can still apply for a modification but you have to draft an LOE telling the bank that they don’t exist.
Solution: Give the bank written confirmation that the document they need does not exist so they can move forward with the review. It usually can be one sentence:
“I did not file taxes for 2020 so I do not have a tax return to provide.”
“I do not have any open bank accounts so I cannot provide any bank statements.”
You have made a mistake on your application or reported conflicting information that needs to be clarified
The most common examples of conflicting reporting happen when:
- The application says one thing and your documents say another: You may have said on your application you only receive one type of income but then you sent in a statement showing another type of income received (example – you only reported W2 wage income but then you sent in a social security award letter. You likely just wrote your income in the wrong spot on the application). The bank will ask you to draft an LOE confirming whether you actually receive the social security income or not.
- You calculated your income wrong: You reported a number for your monthly income that does not match the income verification documents you sent (the bank will ask you to clarify why the math doesn’t add up).
- You marked “no” on the application when you should have marked “yes” or vice versa: A common example occurs when people accidentally mark “no” on the application telling the bank that they do not have an HOA but then the bank sees that HOA dues are being paid from the bank statement.
Solution: Tell the bank that you made a mistake and explain what the mistake was. Then state what the correct information should be.
Then you should also fix the mistake on the application and re-send that with the correct information marked.
5 Elements of a Correctly Formatted Letter of Explanation
Once you understand why the bank is asking for an LOE and what they’re wanting you to say, the last thing you can do to help your package make it smoothly through the process is to format your letter correctly.
Here is what a perfect letter of explanation will look like:
- A header at the top of the page that includes the following information:
- Your name as it shows on the mortgage
- Your loan number
- Your full property address
- A subject line that tells the bank what the LOE is referencing
- E.g. “LOE regarding deposits” or “LOE regarding bank statements” or “LOE regarding commission”
- A date at the top of the letter as recent as possible
- A wet signature from the borrower(s), not an electronic signature
- Signatures from ALL borrowers on the loan sign the LOE, even if the subject matter only relates to one borrower.
- For example, if one borrower receives commission and drafts an LOE, the subject matter is related only to the borrower that receives commission but the other borrower needs to sign the LOE as well.
- Only enough information to answer the bank’s question, sent as a standalone document, unattached to other documents (unless the LOE is fixing a mistake on your application – then send it in attached to your application as described in Scenario 4!)
LOEs can be annoying to write and can slow the process down so the best thing you can do for yourself is to predict the need for an LOE and include the LOE with your initial package submission.
This will massively cut down on time delays as the bank won’t have to issue the request for the LOE(s).
If you need help knowing whether you will need to include an LOE as part of your package or want to talk about the loan modification submission process in general, feel free to give me a call at (425) 654-1674.
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