Free downloadable sample letter of explanation for cash-out refinance
Sometimes, the lender’s underwriter will request a letter of explanation (LOE or LOX) for why you are seeking a cash-out refinance and what the funds are for.
Here is a template to use.
>>Download the PDF here (requires PDF editor to edit)
Sample letter of explanation for cash-out refinance
Acceptable reasons for a cash-out refinance
According to Fannie Mae, you can use funds from a cash-out refinance for any purpose. So there are literally no limitations (within the law) for what you can do with the money.
However, the lender still has the discretion to deny a loan if it’s not comfortable with it as a whole package. A lender probably won’t deny you for simply “wasting money” on a big vacation. Still, the underwriter may want to strengthen the file with a good LOE.
“Good” reasons for a cash-out, according to lenders:
- Consolidate a 1st and 2nd mortgage
- Remodel the home
- Consolidate high-interest debt
- Lower overall monthly debt payments
- Pay off student loans
- Anything that puts you in a better financial situation
“Not so good” reasons to take cash-out
- Extravagant vacation
- Paying off credit cards that you will obviously run up again
- New boat or another depreciating asset
- Any purpose that does not improve your financial situation in the long run
“Bad” reasons to take cash-out
- Illegal activity
- Risky investing, especially crypto
Reasons that will raise additional questions
- A down payment for a second home or investment property
- Starting a business
Why do underwriters ask for a letter of explanation for a cash-out refinance?
As shown above, not all reasons for cash are created equal.
Some put you into a better financial position or make the collateral (the house) more marketable. Thumbs up.
However, certain reasons are just a waste of money in the eyes of the lender, or worse, could put you in financial trouble.
Some cash-out reasons raise more questions. If you’re taking cash out to go into more debt, such as buying a second home, the lender will need to know the terms of the new loan. Plans to start a business could derail the approval because your W2 income that is used to qualify could dry up after closing.
Get advice from your loan officer about how the underwriter might view your reason for cash out if asked.
Should I submit a cash-out LOE when not asked for one?
No. Never volunteer more information than is required. Don’t hide anything, but you also don’t want to raise questions about your loan file if they can be avoided.
Good luck with your cash-out refinance!