When something in your mortgage application requires clarification, your lender might ask you for a letter of explanation.
Editorial disclosure: Our goal is to give you the tools and confidence you need to improve your finances.
After you apply for a mortgage, the lender will evaluate your application and financial documentation to verify that you meet its requirements for loan approval.
If the lender finds information that raises red flags, it might ask you for a letter of explanation to shed light on the issue — whether it be a gap in employment, a derogatory mark on your credit, or an unusually large deposit in your bank account.
When applying for a mortgage, you may need to provide your lender with a letter of explanation. This detailed letter is used to clarify issues or address gaps that appear in your application paperwork. Learning how to craft an effective home loan letter of explanation can help boost your chances of approval.
In this comprehensive guide, we will cover when and why these letters are required during the underwriting process. You’ll also find a downloadable template to make composing your own mortgage letter of explanation simple
What is a Letter of Explanation?
A letter of explanation (or LOE) is a document you submit to your mortgage lender to explain negative marks or anomalies that show up in your application. It provides additional context and details to help reassure underwriters that you are still a qualified borrower.
Common situations that may call for a home loan letter of explanation include
- Gaps in employment history
- Large deposits or withdrawals
- Recent bounced checks
- Late payments and collections
- Short sale or foreclosure
- Bankruptcies
- Low credit scores
The letter allows you to clarify the circumstances behind these financial events and illustrate your ability to manage credit responsibly moving forward. A strong letter can help prevent delays or denials during underwriting.
When is a Letter of Explanation Required?
In general, you will need to provide an LOE any time the underwriter finds questionable items in your application that raise concerns. Typical triggers include:
- Major credit report problems – late payments, collections, charge-offs, etc.
- Sudden changes in income or assets
- Gaps in employment greater than 30-60+ days
- High debt-to-income ratio
- Discrepancies in documents
Guidelines from FHA, USDA, VA, Fannie Mae, and Freddie Mac also require lenders to obtain letters of explanation for certain red flags that appear. Your specific loan program and lender will dictate if and when you need to provide a letter.
What to Include in a Home Loan Explanation Letter
Your letter of explanation should provide detailed information to justify any financial inconsistencies. Include:
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Today’s date – This verifies the letter is current.
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Lender’s name and contact info – So they know who to follow up with about your application.
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Loan identifier – Your application number, if you have one.
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Subject line – Make it clear what the letter is regarding.
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Explanation of the issue – Provide context around the negative credit event, employment gap, etc.
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Specific dates and details – Give the when, where, how much, and who related to the situation.
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Steps taken to improve – Note any action you’ve made to get your finances back on track.
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Supporting documentation – Include additional statements, bills, etc. to validate claims.
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Signature – Sign and print your name to authenticate the letter.
Keep explanations brief, honest, and focused on facts rather than emotions. Stick to details the underwriter needs to know to re-evaluate your application fairly.
Letter of Explanation Template
Use this sample letter of explanation template as a guide when drafting your own:
<Date><Lender Name> <Lender Address><Lender Phone Number>
RE: <Your Full Name> Mortgage Application
To whom it may concern:
I am writing to explain the circumstances surrounding the late mortgage payments on my credit report from <Date> to <Date>.
In <Month, Year>, I lost my job as a <Position> when <Company> went out of business during the pandemic. I was unemployed for <X> months and fell behind on my mortgage payments during that time. On <Date>, I started a new job as a <Position> at <Company> which allowed me to bring my mortgage current as of <Date>.
I have been employed at <Company> for the past <X> months and my income is now stable. As evidenced by the attached mortgage statements, I have made all payments on time with no further issues since resolving this temporary financial hardship.
Sincerely,
<Sign Your Name><Print Your Name><Your Address><Your Phone Number>
Tips for Writing a Strong Explanation Letter
Follow these tips and strategies to craft a letter that alleviates lender concerns:
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Be truthful – Honesty is key. Exaggerating or lying will only raise more red flags.
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Take responsibility – Don’t make excuses or blame others. Demonstrate you understand the situation was in your control.
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Keep it brief – Be concise. Only include details the underwriter needs to know.
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Highlight positives – Note any steps you’ve taken to improve your financial standing.
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Verify claims – Provide evidence like account statements to back up explanations.
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Mind spelling and grammar – Typos look sloppy. Have someone proofread your letter.
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Send promptly – Submit your letter as soon as possible to avoid slowing down underwriting.
Sample Explanation Letters
Here are examples of explanation letters for two common situations:
Job Loss
July 5, 2022
ABC Mortgage Company
123 Lender Lane
Anytown, CA 12345
555-123-4567
RE: Michelle Thompson Mortgage Application
Dear Underwriter,
I am writing to explain the 60-day gap in employment shown on my mortgage application. I previously worked as an Accounting Assistant at Smith & Smith, LLC from March 2018 up until I lost my job on January 5, 2022.
The company had to do pandemic-related layoffs that unfortunately included my position. I used my severance pay and savings to cover expenses during the time I was unemployed.
On March 15, 2022, I started my current role as a Staff Accountant at Jones Financial Partners. As shown on my signed offer letter, I have stable ongoing employment. Since starting this position, I have had no issues paying my regular bills and obligations.
Sincerely,
Michelle Thompson
123 Main St.
Anytown, CA 12345
555-867-5309
Late Mortgage Payment
September 30, 2022
XYZ Mortgage Company
456 Lender Ct.
Sometown, NY 54321
333-444-5555
RE: John Doe Mortgage Application
Dear Underwriter,
I am writing to explain the late mortgage payment on my credit report from June 2022. In May 2022, my wife required unexpected urgent surgery that resulted in over $8,000 in medical bills.
Due to these unforeseen medical expenses, I fell behind on mortgage payments for one month while I worked on establishing a payment plan with the hospital. As of July 2022, I am now current on my mortgage as evidenced by the attached account statement.
Sincerely,
John Doe
789 Main Ave.
Sometown, NY 54321
222-333-4444
Frequently Asked Questions
What if my explanation letter is denied?
You can request reconsideration and provide additional details and documentation. Or, you may need to take steps to improve your financial standing before reapplying.
Do I need to write a letter for every issue?
You may need to address multiple topics in one comprehensive letter. But focus on being concise for each item.
Can I submit other documents with my letter?
Yes, you should include any statements or records that validate the claims made in your explanation letter.
Get Your Home Loan Approved
Addressing problems upfront with a clear mortgage letter of explanation helps prevent delays during underwriting. If you have potential red flags on your application, take the time to draft an honest detailed letter.
Following our template and writing tips will make the process smooth and hassle-free. With an accurate compelling explanation letter, you can overcome issues from your financial past and still qualify for the home loan you need.
Buying a home far from where you work
If your new home is more than 50 miles or so from your place of employment, your lender might suspect that you’re purchasing a second home or investment property rather than a primary residence.
Lending standards are tougher for non-primary residences, and interest rates are usually higher.
Credit report issues
Past credit problems might prompt a request for a letter of explanation because they suggest you’ve had trouble managing your debt. These problems include:
- Late payments
- Collection items
- Charge-offs
- Bankruptcy
- A short sale or foreclosure
Excessive credit inquiries can also be a red flag and could make the lender suspect you’ve been shopping for credit because you’ve had trouble getting approved.