How to write a letter of explanation

You've finally found your dream home. The current owners have accepted your offer. Now you're going through the mortgage application process, and the lender has requested a letter of explanation. Don't panic. Letters of explanation are a common request, and the requirements may vary by lender. Here we'll walk you through what a letter of explanation is, how to write one and provide you a few examples.

Mortgage lender requirements

When you apply for a mortgage, you will need to provide the lender financial information, including bank statements, pay stubs, tax returns, credit card information and more. Gathering and making sense of these documents can be overwhelming or tough if your financial history contains any inconsistent or missing information, or if this is simply the first time you're applying for a mortgage loan.

In some cases, lenders may require even more information, including a letter of explanation, to ensure the borrower can repay the mortgage for which they are applying and to provide more insight into certain areas of the borrower's loan application, including:

• How the borrower is obtaining the money for the down payment or closing costs
• Whether the borrower recently opened any new credit accounts
• Any discrepancies on the borrower's credit report
• Any credit blemishes such as serious delinquencies, bankruptcy, or foreclosure
• Any gaps in employment or earnings history

What is a letter of explanation?

A letter of explanation, or LOE, is a common request from home lenders to get answers to their questions about a borrower's loan application. This letter, and any supporting documentation, will give the underwriter (who finalizes the loan) all the documentation they need while reviewing your application.

Lenders are often required to get letters of explanation for certain loan application issues, such as uncomplimentary information on your credit report, freelance income or any of a variety of harmless but uncommon scenarios.

Why might a mortgage lender ask for a letter of explanation?

Mortgage lenders may require letters of explanation for certain application-related requirements or to further understand areas of the application that may not be apparent. These areas typically have to do with income, employment or credit.

Reasons related to your credit history

In general, if your credit score is low, you may need to explain why, since credit scores and credit history are part of how you show you will keep your financial commitments over time. You might need to write a letter of explanation if:

• You have a history with any late or missing payments.
• You experienced negative circumstances like delinquent accounts or a foreclosure.
• You recently acquired (or tried to acquire) a new loan or credit card.
• You cosigned for a loan but aren't personally making the payments.

In general, bank statements may also require some explanations, including if you've had large deposits or withdrawals recently, and if your family members use a joint account with you but aren't involved in purchasing the home.

Reasons related to your employment history and income

Your employment and the resulting income are a big part of how underwriters determine your ability to repay a loan. They may ask for explanations for a variety of employment situations:

• When you've had recent changes in employment or gaps in your employment history, a simple explanation of what went on can help to establish that you're now able to maintain the income needed to pay your mortgage.
• Inconsistent income, such as a freelance or self-employment job, can require more explanation to assure the underwriters of your income stability.
• If you've filed substantial losses on your tax returns, such as in a business you own, you may need to explain how your business is doing or how your business has recovered.
• If your employer's location is very far from the home you're considering buying, a letter of explanation may be required to confirm that you work remotely.

Reasons related to your living situation

Lenders have good reasons to know why you want to buy a house. You may need to submit a letter of explanation to confirm:

• Your intention to use the home as a primary residence, vacation home or rental property
• Your current living situation if you offer more than one address in the application process
• That you're living rent-free with someone, such as a family member

By explaining your situation, you'll offer the lender all the information they need to correctly assess your ability to pay your mortgage.

Tips for writing a letter of explanation

Just like any business letter that you write, the letter of explanation should be clear and to the point. While the content of the letter will change depending on your situation, be sure to:

• Provide all details the best you can, including correct dates and dollar amounts.
• Explain how and when all situations were resolved. If they are not resolved, explain that as well.
• Detail why problems won't happen again.

Remember, only you know your situation well enough to explain it. Do not have someone else write the letter for you.

What to include in a letter of explanation

Below are a few aspects you will want to include in your letter:

• Your name, mailing address and phone number
• The date
• The loan application number
• The lender's name, mailing address and phone number
• Your explanation, along with references to any supporting documents you are including

Remember to include copies of all documentation along with your letter before you send it.

Letter of explanation examples

The reasons you may need to submit a letter of explanation vary, so here we've provided a few possible examples. And remember, be concise and stick to the facts. Provide only the information requested, not a lot of additional context or detail.

Example 1: Late auto payment

John Smith
123 Main St.
Anytown, US 00123

January 7, 2025

Re: Mortgage application 5142300

Dear Mr. or Ms. (name of person requesting the letter of explanation),

This letter explains the item you asked about on my credit report: Late payment to First Auto Bank for car loan dated 05/01/2020.

During the COVID-19 pandemic, I was terminated from my position during restructuring at my former employer in April 2020 and was unable to make my $550 May car payment. Fortunately, I found a new job in late May, and I made up the back payment and late fee.

I fully understand the responsibility of taking on a mortgage and plan to make all my payments in full and on time. I sincerely hope you will consider approving my application.

Sincerely,

John Sample

Example 2: Delinquent medical bill

This letter is to explain the delinquent medical bill to Boston Medical Center that appears on my credit report.

Because I have never seen the provider listed on this bill, I believe that I was billed in error, and I have initiated proceedings to dispute the bill on October 1, 2024. I haven't received a response yet regarding the dispute. I pay my medical bills on time and have no other late or missing payments or delinquent accounts on my credit history.

Example 3: Large deposit

This letter explains the item you asked about on my bank statement.

We sold our second car recently, a 2011 Honda Fit, to (name of recipient) and deposited the proceeds, $7,000, into our checking account at First Bank on September 9, 2024. I am including the receipt for the sale of this car.

What happens after you submit a letter of explanation?

After you submit a letter of explanation, it could be multiple days before you hear back. If a lender asks for more details or information, answer as soon as possible to not delay your loan application.

If the lender comes back with an approval for your loan, you can proceed with the purchase of your home — congratulations! Your effort on the letter of explanation has paid off.

If the lender rejects your application for a loan, they will provide you with an adverse action notice, which will offer reasons for denial. If this happens, you could consider working with another mortgage lender, or you may want to resolve any issues that were raised by the lender. Doing this may give you a better chance of approval in the future. Knowing more about what it takes for a lender to approve your mortgage application will equip you for next time.

Use a letter of explanation to enhance your loan application

A letter of explanation is simply a tool that helps your lender's team understand your financial situation more fully. Giving exactly the information they request with the appropriate level of detail helps the team reviewing your application truly understand your financial picture.

Are you ready to begin the homebuying process? Get pre-qualified for a mortgage and learn more about your next steps.