How to Write a Letter of Explanation for a Mortgage

Understanding the Purpose and When One is Needed

Lenders request a Letter of Explanation (LOE) to gain clarity on aspects of a mortgage application that fall outside typical underwriting parameters. This written statement provides human context to financial data, helping underwriters assess perceived risks and ensure compliance with lending guidelines. An LOE allows the lender to understand the full story behind anomalies, which is important for determining a borrower’s creditworthiness and repayment capacity.

Several common situations typically prompt a lender to request an LOE during the mortgage application process. For instance, unexplained large deposits in bank accounts, particularly those not originating from regular payroll, often raise concerns for lenders. These deposits could indicate undisclosed liabilities or potential money laundering, necessitating a clear explanation of the source and purpose of the funds. Similarly, gaps in employment history or significant changes in income can signal instability, leading lenders to seek an LOE to understand the reasons behind these changes and how income was maintained.

Credit report discrepancies, such as late payments, collection accounts, or charge-offs, also frequently trigger LOE requests. Lenders use these explanations to understand past financial challenges and assess the likelihood of future repayment. An unusual or sporadic address history might prompt an LOE to verify residency and identity, while recent credit inquiries or newly opened accounts could suggest increased debt or a change in financial habits. Furthermore, issues like identity theft affecting a credit report or changes in marital status or name may require an LOE to clarify the situation and provide legal context. Each of these scenarios presents a potential red flag that an LOE helps to resolve, providing transparency for the underwriting process.

Essential Components of Your Letter

A standard, professional format ensures clarity and readability for the lender when preparing a Letter of Explanation. The letter should maintain a professional tone throughout, avoiding emotional language, and focus solely on factual information. Include clear headings if the letter addresses multiple issues.

Every LOE must contain specific information. Start by including your full contact information at the top, followed by the current date. Address the letter to the specific loan officer or underwriter if known, or “To Whom It May Concern” if a direct contact is unavailable. A precise subject line is necessary, clearly identifying the purpose and referencing your loan application number.

Within the body of the letter, state the specific issue clearly and concisely in the opening paragraph. Provide a factual and detailed explanation of the circumstances surrounding the issue. This explanation should be brief yet comprehensive, offering enough context for the underwriter to understand the situation. Conclude by mentioning any supporting documentation that will be provided alongside the letter, such as bank statements or official records. Sign the letter with your full legal name.

Explaining Specific Situations

When addressing specific financial situations in your Letter of Explanation, tailoring the content to the particular issue is important. For instance, if explaining large deposits into your bank account, specify the exact date and amount of each deposit. Clearly state the source of the funds, such as a gift from a family member or the sale of an asset, and explain the purpose of the deposit. Supporting documentation, like a signed gift letter or a bill of sale, should accompany this explanation.

For employment gaps, your explanation should detail the specific dates the gap occurred and the reason behind it, such as a period of unemployment, further education, or caring for family. Describe how you managed your finances during this time, perhaps through savings or unemployment benefits, demonstrating financial stability. Providing documentation like unemployment benefit statements or transcripts for educational periods can substantiate your claims.

If addressing credit report discrepancies, identify the specific item, such as a late payment or collection account. Explain the reason for the issue, like a medical emergency or a billing error, and outline any steps taken to resolve it, such as negotiating a payment plan or disputing the charge with the credit bureau.

When explaining significant changes in income or employment, clearly state the nature of the change, whether it was a promotion, a job change, or a reduction in hours. Provide the dates of these changes and explain how your current income level supports the mortgage payment. Recent pay stubs or an employment verification letter from your current employer are supporting evidence. Each explanation should be honest, factual, and provide clarity to the lender.

Finalizing and Submitting Your Letter

After drafting your Letter of Explanation, a thorough review is essential. Carefully proofread the entire document for any grammatical errors, typos, or unclear phrasing that could hinder understanding. Ensuring accuracy and clarity aids a smooth underwriting process.

Once satisfied with the content, sign and date the letter with your full legal signature. Attach all supporting documentation referenced within the letter, such as bank statements, gift letters, or dispute confirmations. These documents corroborate your explanations and are often required by underwriters.

The method of submission will be guided by your loan officer. You may be asked to upload the letter and documents through a secure online portal provided by the lender, send them via email, or mail physical copies. Always confirm the preferred submission method with your loan officer to ensure timely receipt. Finally, retain a complete copy of the submitted Letter of Explanation and all attached supporting documents for your personal records.