Letter of Explanation for Mortgage: How to Write One

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 mortgage lender. The details you provide in your LOE should improve your chances of qualifying for financing.

Andrew Lokenauth, founder and CEO of TheFinanceNewsletter.com, a financial education website and newsletter, 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 that 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 it wants your answer formally in writing.

» MORE: Mortgage pre-qualification vs. preapproval

Why you might need a letter of explanation

A lender might ask for a letter of explanation if there are any inconsistencies or confusing information on your loan application. 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 it 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 several credit inquiries, your lender may want to know where the credit inquiries came from and whether you acquired new debt.

» MORE: 9 mortgage questions to ask your lender

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 the current 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,” Andrew Lokenauth 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.

5. Proofread your LOE

Before submitting an 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. If your letter and documentation don’t properly address the lender’s request, it will likely reject your LOE, which will prolong the loan application process or lead to denial.

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]

ATTN: [Name of the underwriter who requested the LOE]
[Your lender’s name]
[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]

FAQ

Bottom line

While being asked to write a letter of explanation may 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 the time to format the letter properly, and be sure to answer the lender’s question directly.