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Letter of explanation for mortgage: how to write one

If your lender asks for a letter of explanation, here’s how to write one

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If you're buying a home and your lender asks for a letter of explanation (LOE), it doesn't necessarily mean you’re in trouble. Lenders often request letters of explanation to clear up simple details or explain something in your loan application or credit report.

Promptly providing a letter of explanation to your lender can help expedite the loan process and move you one step closer to closing. If you don’t, your loan closing could be delayed or even denied.


Key insights

  • Your mortgage lender might request a letter of explanation if it needs information on your loan application clarified.
  • Common reasons for a lender to request an LOE include large deposits into or withdrawals from a bank account, gaps in employment, a recent job change and unexplained inquiries on your credit report.
  • Being asked to supply an LOE may catch you by surprise, but it’s a fairly common occurrence in the mortgage industry and no reason for alarm.

What is a letter of explanation for a mortgage?

A letter of explanation for a mortgage is your chance to explain information on your loan application to your lender. The details you provide in your LOE should improve your chances of qualifying for financing.

Andrew Lokenauth, an adjunct professor who teaches accounting, economics and finance at the University of San Francisco, said lenders often request an LOE when information on a mortgage application doesn't line up.

That doesn't necessarily mean anything is wrong or your application is on the verge of being denied. When a lender asks you for an LOE, it only means it has a question and wants your answer formally in writing.

Why might I need a letter of explanation?

Inconsistencies or confusing information on your loan application could prompt a lender to ask for a letter of explanation. Common items that need clarification are:

  • Other property you own: Your lender may ask you to write an LOE to explain other property you own, including property owned independently or with someone else.
  • Increase in your total debt: If your debt level has increased significantly since you applied for a home loan, you may be asked to explain why.
  • Gaps in employment history: If gaps in your employment are not explained in your mortgage application, an LOE can clear up potential issues.
  • Large deposits into your bank account: You may need to explain large deposits into your bank account, even if it’s money you earned through traditional employment.
  • Large withdrawals from your bank account: Large withdrawals from your bank account can make a lender worry you won't be able to repay your home loan, so they may require an explanation.
  • A significant drop in income: If your income has been lower in certain months since you applied for a mortgage — for example, because you work on commission and had a slow month — you may be asked to explain why.
  • Tax return losses: If your tax return shows losses, your lender may require an explanation.
  • Unexplained credit inquiries: If your credit report has credit inquiries, your lender may want to know where the credit inquiries came from and whether you acquired new debt.

How to write a letter of explanation

Writing a letter of explanation shouldn’t take very long. However, make sure you include all relevant details your lender might need.

Here's a rundown of what you should include in an LOE:

  1. Identify yourself and date the letter. At the beginning of the letter, provide your full name and your co-borrower’s name (if you have one) and today’s date. Also include your personal address and phone number.
  2. Provide information about your loan application. Include details to identify your loan application, such as the application number, the address of the property you're trying to buy or both.
  3. Answer the question your lender asked. Your letter should include all relevant information about the issue in question. "If the letter is explaining a recent job change, it should include the date of the change, [your] previous and current job titles and the reasons for the change," Lokenauth, the USF professor, said.
  4. Provide supporting documentation. Send copies of any supporting documentation you have to back up your answer. That could mean sending your most recent bank statements or pay stubs, or providing proof you own a specific property or paid off a loan.

Letter of explanation template

The following template is a general idea of how a letter of explanation should look:

[Your name as it’s listed on your mortgage application]

[Your current address]

[Today’s date]

[Your lender's name]

ATTN: [Name of the underwriter who requested the LOE]

[Your lender's address]

Dear [underwriter's name],

My name is [your name], and I'm writing to supply the information you requested. This letter is regarding loan number [loan application number], which I applied for to purchase [address of the property you're trying to buy].

[Provide an answer to the lender's query, along with documentation that can prove the information you're sharing is correct.]

Sincerely,

[Your name as it’s listed on your mortgage application]

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    Frequently asked questions (FAQ)

    How long should my letter of explanation be?

    The length of your letter of explanation will depend on the information your lender requested and how many words it takes to provide an explanation. If you can answer your lender's question in a few sentences, that's perfectly sufficient.

    What if the lender rejects my letter of explanation?

    If the lender rejects your letter of explanation, you may need to write a new one that better answers the lender’s question. You may need to provide additional or better documentation to support your claims. The lender should detail any next steps when rejecting your LOE.

    Is it bad if a lender asks me for a letter of explanation?

    Lenders frequently ask for an LOE to clarify information so they can approve a loan. A request for an LOE doesn’t necessarily mean your home loan application will be denied.

    Bottom line

    While being asked to write a letter of explanation may at first seem stressful, it allows you to provide further context to your loan application and increases your chances of getting approved. If you get a request for one of these letters, take time to format the letter and answer the lender’s question directly. Before submitting the LOE, read over the lender’s request and your response one more time to make sure you’ve provided all the necessary information and documentation.

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