What is a Description Book? Your Chance to Talk to the Author Below

Mortgage Q&A Series: “What is a loan description?”

If you’re currently going through the exciting process of getting a home loan, you may have been asked to provide a “letter of explanation,” also known as an LOE.

Simply put, it allows you to add more color to what the underwriter may feel is a complicated story.

You can think of a mortgage underwriter as a mortgage detective, hired to uncover anything unusual that may appear in your loan file as documents are submitted.

Sure, the required paperwork may be there, and your credit score and DTI rating may be visible, but it’s the job of the underwriter to read between the lines.

Otherwise, mortgage applications can actually be fed through automated underwriting systems and that could be the end of it. We wouldn’t need any more people.

Not so, at least not yet, so expect your loan application to be processed, and be ready to “explain” if anything comes up that the underwriter feels needs explaining.

Definitely don’t argue with the underwriter or be rude, that’s never a good strategy. When I worked for a lender, I always went out of my way to be kind to the underwriters. You should too.

Ultimately, the faster you can get the answers they need, the faster you can get a home loan and get on with your life.

What is the Purpose of a Letter of Description? It depends

• You recently changed jobs
• You have an unusual deposit activity on your bank account
• Recent large deposits
• Gap at work
• You have a declining income
• Your source of income needs to be explained (self-employed borrowers)
• Undisclosed payments (debits) from your bank account
• You have student loans
• New accounts on your credit report (newly opened credit cards)
• Credit inquiries on your credit report
• Other addresses on your credit report
• Other names on your credit report
• Notes on your credit report need explanation
• Ex-offenders who need to be reviewed
• Concerns about location (is it your primary residence?)

When you apply for a loan, you will be approved or rejected. If you are given the green light, the approval will essentially be a conditional loan approval.

This means you still have work to do to get to the funding table. This will include submitting both pre-doc conditions (PTD) and pre-fund conditions (PTF) for final approval.

One of those PTD situations might be a letter of explanation that describes something the underwriter needs more clarification on, such as a recent job change or an unusually large deposit.

It’s that simple. The LOE is written and submitted by the borrower for explanation.

Letter of Description Requirements Will Vary by Borrower

There are many situations where a letter of explanation may be required, too many to list. And maybe new ones are produced every day. But I listed a bunch above.

Additionally, the LOE requirement will vary by mortgage lender. Not everyone will need one depending on the situation.

Finally, some lenders and underwriters will be more strict and/or more cautious than others.

That being said, some of the more common ones tend to be about assets aka money, and where it comes from.

For example, if you have provided bank statements to satisfy one of your loan conditions, the underwriter may flag some of the transactions or deposits upon review.

Maybe there’s a $10,000 deposit in the account, which doesn’t match what you’re making in the way of income. It seems out of place, even if it is perfectly legal.

The underwriter may ask you to explain the deposit to ensure it is kosher, and not from an improper source.

Let’s say the money came from one of your accounts, and you just transferred the money between the accounts.

You can provide an LOE to the underwriter explaining this. But that would not be the end of the story. If your LOE includes information for another bank account, they can certainly look for statements from that bank account and review the transaction to make sure everything matches up.

Sometimes, if you are lucky, you may even be asked to bring another reference letter because of the content of your previous LOE. Basically, LOE for LOE.

As you can see, things can get messy quickly, so it’s best to keep things tidy before applying for a home loan.

It is rare for mortgage underwriters to be completely satisfied with everything presented to them. And the more you put in front of them, the more likely they are to ask for it, more.

[Who are all the people involved in the mortgage loan process?]

Letter of Description Template for Buying a Home

• Add a basic subject line and salutation to make it official
• A short explanation to clear up the confusion (short and sweet!)
• Sign it and write it
• And provide the necessary documents to save the book if needed
• See a sample letter of explanation below

You may be wondering how to write a cover letter (assuming one has been asked of you).

The screenshot above is a sample LOE template I created in a few minutes if you’re wondering.

The good news is that it is very easy to create. It’s basically a Word document (or comparable program) with a small heading and a short paragraph or two to provide clarity, followed by your signature and the date it was written.

There are no set formatting guidelines for LOE, so you can put the date up or down, and leave out the salutation if you want. It doesn’t matter much as long as the important information is there.

You can put “Description Letter” or “Description Letter” at the top, followed by a brief description of the issue at hand, then name/signature/date. It doesn’t really take much effort to create one.

That’s the easy part. The hard part may be providing supporting documents, or explaining your case if you don’t have an explanation readily available.

What you write in those few paragraphs is very important, so don’t rush the core message you’re trying to convey.

In short, whatever you describe should make sense, and most importantly, put the underwriter at ease. They need to feel comfortable approving your loan, and anything that costs an LOE to begin with makes them nervous.

It’s certainly not the end of the world, and usually just hearing from your own words that X happened because of Y is good enough, with the supporting documentation to prove it. Taking your word for it is unacceptable.

Either way, don’t be afraid to ask the loan officer or real estate agent what they want to hear, or how you should format the letter. If you have questions or are unsure, ask before you send documents that could get you into more trouble.

Keep it Easy to Avoid LOEs in the First Place

• Think about what might trip the guard up ahead
• Take action to resolve these issues before applying for a loan
• So LOE is not required at first
• It can make life a lot easier and improve the chances of getting a loan approved

Your best move might be to get all your ducks in a row long before you apply for a loan.

For example, if you need to transfer money, it would be wise to make that transfer 60+ days before the loan application.

Mortgage lenders usually only ask for your last two bank statements, so previous work shouldn’t be visible.

Any financial activity that takes place a few months before the application can make things complicated, and require a lot of paperwork. And with that, scrutiny.

If your accounts have not been touched and there are no abnormalities, you can slide in without any additional conditions.

The same goes for opening new accounts – if you don’t need to, don’t. It makes life very difficult.

If you’re thinking about changing careers, maybe wait. Anything you think might sound short or complicated might be best avoided, for now. Or at least until the loan!

At the end of the day, LOEs aren’t that hard to give or clear, but they can lead to big problems if you don’t have good answers!

As noted, do your best to play ball and make good with everyone, whether it’s the loan officer, processor, or underwriter, to avoid unnecessary drama.

Finally, if you are asked to provide a letter of explanation and are not sure why, speak directly with your mortgage broker or loan officer.

I often get emails and comments about why someone is being asked. Instead of asking me, it’s probably a better idea to ask your broker or bank representative to get to the bottom of it as soon as possible.

Read on: What Do Mortgage Loan Processors Do?