What Is a Letter of Explanation and When Is One Needed?

A Letter of Explanation (LOE) is a formal written statement clarifying unusual financial or personal situations during an application process. It provides insights beyond standard documentation. Financial institutions often request an LOE to understand an applicant’s profile. It addresses uncertainties or discrepancies, ensuring clarity.

Purpose of a Letter of Explanation

Financial entities request a Letter of Explanation for clarity and context not evident from submitted documents. Underwriters review applications, and an LOE helps them understand unusual activity. It mitigates concerns by explaining situations like large deposits or employment changes that might raise questions. Applicants can proactively address potential red flags, resolving discrepancies for a smoother review. An LOE helps institutions assess risk more accurately and make informed decisions.

Situations Requiring a Letter of Explanation

Several financial scenarios may prompt an LOE request. Unusual bank deposits, especially large sums not from regular payroll, often require explanation about the source of funds. Gaps in employment history, particularly over 30-60 days in the last two years, often need explanation for income stability. Credit report discrepancies, such as late payments, collection accounts, or multiple recent inquiries, can suggest financial instability or excessive new debt.

Sudden income changes, like shifting to self-employment or commission-based work, may require an LOE to show income stability. Personal information discrepancies, such as an address not matching records, also need clarification. Significant tax return losses or being a co-signer on another loan can impact financial assessment and require explanation. These situations highlight the need for clear, factual context to support their financial standing.

Key Elements of a Letter of Explanation

A well-crafted Letter of Explanation requires a specific structure and precise details. Begin by stating the current date, recipient’s full name, title, and the financial institution’s mailing address. Include your full name, current mailing address, and contact information. A concise subject line is essential, identifying the purpose and often including your loan application or account number.

The body should directly address the specific issue. Provide a factual, detailed explanation, avoiding emotional language or unnecessary information. Include specific dates, dollar amounts, and other relevant data. For instance, if explaining a late payment, specify the exact date, original due date, and amount. Describe any corrective actions or plans to prevent future occurrences.

Mention any supporting documentation you are attaching. Common examples include bank statements, pay stubs, gift letters, divorce decrees, or medical bills, depending on the situation. Conclude with a professional closing, such as “Sincerely” or “Regards,” followed by your handwritten signature and typed full legal name. The overall tone should remain formal, factual, and concise.

Submitting Your Letter of Explanation

After carefully preparing your LOE, submit it to the requesting financial institution. Institutions typically specify their preferred submission method, such as uploading through a secure online portal, sending it via email to a designated address, or mailing a physical copy. If submitting digitally, ensure you use the correct upload fields or email addresses provided to avoid delays.

For physical mail, confirm the precise mailing address and consider using a service that offers tracking to verify delivery. Regardless of the method, keep a complete copy of your submitted LOE and all supporting documentation for your personal records. This ensures you have a reference in case any questions arise later in the process. Inquire about confirmation of receipt, such as an email acknowledgment or a tracking number, to ensure your document has been successfully received and is under review.