What Is a Letter of Explanation (LOE) in a Mortgage?
Clarify your mortgage application with a Letter of Explanation (LOE). Understand this vital document for providing context to lenders.
A Letter of Explanation (LOE) serves as a supplementary document in the mortgage application process. This written statement provides clarity and context to a lender regarding an applicant’s financial history or personal circumstances that might raise questions during underwriting. Its purpose is to address inconsistencies or unusual activity, ensuring the lender understands the borrower’s financial standing. By explaining potential “red flags,” an LOE helps facilitate the loan approval process.
Common Reasons for a Letter of Explanation
Mortgage lenders frequently request a Letter of Explanation to understand certain financial events or patterns. A common trigger is unusually large deposits in bank accounts that are not part of regular income. Lenders scrutinize deposits, especially those that are a significant percentage of a borrower’s total monthly qualifying income, to confirm their legitimate source and ensure no undisclosed debt.
A frequent reason for an LOE is a gap in employment history. If an applicant has periods of unemployment or significant changes in job roles, lenders may seek an explanation to assess income stability and consistency. Fluctuations in income can also prompt a request for clarification.
Credit report discrepancies also necessitate an LOE. This includes late payments, accounts sent to collections, or a high number of recent credit inquiries. Lenders review these to understand the circumstances that led to the credit issues and to see if the borrower has improved financial management. Major derogatory marks such as bankruptcies or foreclosures will require a detailed explanation.
Changes in address or discrepancies between current and past addresses listed on credit reports can also lead to an LOE request. Lenders may seek to confirm residency and ensure no undisclosed financial responsibilities are tied to previous locations. If a portion of the down payment is a gift, a Letter of Explanation is required to confirm the funds are a gift, not a loan, and to identify the donor and their relationship to the borrower.
Essential Information for Your Letter of Explanation
When preparing a Letter of Explanation, include specific details. The letter should identify the mortgage applicant and reference the specific mortgage application. Directly state the issue being addressed, such as “Explanation for a 60-day late payment on Account No. XXXX.”
Provide a factual and concise description of the circumstances, avoiding emotional language. Include relevant dates and specific amounts, like the date a late payment occurred or the amount of an unusual deposit. If explaining an employment gap, specify the start and end dates and the reason for the absence from work.
Mention any supporting documentation that will accompany the letter, such as bank statements, pay stubs, or medical bills. Conclude by briefly stating any actions taken to resolve the issue or how the situation has improved, demonstrating accountability.
Crafting Your Letter of Explanation
When writing your Letter of Explanation, maintain clarity and conciseness. The explanation should be brief and to the point, directly addressing the lender’s specific question. Provide a direct answer, demonstrating an understanding of the issue.
Honesty and accuracy are key; all information provided must be truthful and verifiable. Present the explanation with a professional tone, avoiding emotional language or excuses. The letter should be respectful and factual, focusing on the circumstances and resolutions.
Ensure the letter is complete, thoroughly addressing all questions or concerns raised by the lender. If supporting documentation is available, attach these relevant documents, such as bank statements, pay stubs, or medical records, and reference them within the letter. This provides tangible evidence for your explanation. Use a professional letter format, including the date, the lender’s name, your name, and your signature. Before submission, review the letter for any grammatical errors or spelling mistakes.