What Is a Letter of Explanation (LOE) in a Mortgage?

A Letter of Explanation (LOE) is a formal written document submitted by a borrower to clarify specific aspects of their financial history or mortgage application. It is part of the mortgage application process, ensuring financial information is transparent and accurately represented.

Understanding the Letter of Explanation (LOE) in Mortgages

An LOE is a written statement from a borrower addressing unusual or questionable items in their financial records or on the application. Its purpose is to provide context and clarity to mortgage underwriters and lenders. Underwriters scrutinize financial documents, including bank statements, credit reports, and employment histories, to assess a borrower’s ability to repay a loan and ensure compliance with lending regulations.

When a lender requests an LOE, it is a standard procedure to gather additional information. This document aids risk assessment, allowing lenders to understand the circumstances behind financial events. The LOE helps lenders confirm a borrower’s financial profile meets mortgage requirements, facilitating the loan approval process.

Common Scenarios Requiring an LOE

Common situations trigger an LOE request during the mortgage application process. One frequent scenario involves unusual bank account activity, particularly large, non-payroll deposits. Lenders verify the source of these funds, especially if they exceed 50% of the borrower’s monthly income, to ensure they are not undisclosed loans or from illicit sources. Frequent overdrafts or irregular income patterns on bank statements can also prompt an LOE request.

Credit report discrepancies also necessitate an LOE. This includes recent credit inquiries, late payments, collection accounts, or past financial events such as bankruptcy or foreclosure. Lenders use the LOE to understand the circumstances behind these items and assess the borrower’s current financial stability. Address history discrepancies, where the application address differs from credit reports or other documents, also require clarification to confirm identity and residency.

Employment-related issues are another common reason for an LOE. Gaps in employment history, recent job changes, or periods of unemployment often require an explanation to assure the lender of stable income. For instance, a gap exceeding 30 or 60 days, depending on the loan type, may be flagged. An LOE allows borrowers to explain the reasons for such gaps, such as caring for family or returning to education.

Crafting a Clear and Concise LOE

When preparing an LOE, ensure the document is clear, concise, and professional. Address the letter to the loan officer or underwriter, include a clear subject line referencing the applicant’s name and loan application number, and date it. This formal structure helps the lender identify and process the document.

The LOE content must be honest, factual, and directly address the specific issue identified by the lender. Provide precise details such as dates, specific dollar amounts, and account numbers where relevant. Avoid vague statements and focus solely on the matter at hand, without introducing new, unrelated information.

Maintain a calm and non-emotional tone, even if the request feels stressful. The LOE should explain the circumstances that led to the issue and, if applicable, detail the steps taken to resolve it or prevent future occurrences. Supporting documentation is important; attach items such as bank statements, pay stubs, gift letters, or legal documents to corroborate the explanation.

The LOE Submission and Review Process

After crafting the LOE and gathering supporting documents, submit them to the mortgage lender. Borrowers submit the LOE and accompanying paperwork via their loan officer, a secure online portal, or email. Timely submission prevents delays in the mortgage approval process.

Once submitted, a mortgage underwriter reviews the LOE. The underwriter assesses the explanation and supporting documentation to determine if the borrower’s financial situation meets the loan program’s criteria. They verify the information and decide whether the explanation sufficiently addresses initial concerns.

Following review, the underwriter may approve the explanation, allowing the loan application to proceed. They might request further clarification or additional documentation if the explanation is not fully satisfactory. If the LOE is rejected, the borrower may revise and resubmit it, or explore other loan options.