When something in your mortgage application requires clarification, your lender might ask you for a letter of explanation.
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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 loan, you may need to provide a letter of explanation to your lender to clarify any issues or inconsistencies in your application. A letter of explanation allows you to provide details and context to help the lender better understand your financial situation.
Writing an effective letter of explanation is important if you want to improve your chances of getting approved for the mortgage loan. In this comprehensive guide I’ll walk you through everything you need to know about writing a sample letter of explanation for your mortgage application.
What is a Letter of Explanation?
A letter of explanation, also called an LOE or mortgage letter of explanation, is a document you submit to your lender along with your mortgage application to explain any red flags or discrepancies.
Common reasons why a lender may request a letter of explanation include:
- Gaps in employment or income
- Short sale or foreclosure on your credit report
- Large deposits or withdrawals in your bank statements
- Credit inquiries or new accounts recently opened
- Address inconsistencies in your documents
- Insufficient credit history
The letter allows you to clarify these issues and assure the lender of your ability to repay the mortgage loan, Providing a reasonable explanation can help improve your chances of approval,
When Do You Need to Submit a Letter of Explanation?
In most cases, a letter of explanation is only required if the underwriter specifically requests one. The underwriter reviews your mortgage application and supporting documents to evaluate your creditworthiness.
If they find any discrepancies or issues that raise concerns, they will request a letter of explanation to get more details before making a final loan decision.
So don’t submit an explanation letter unless asked. But if requested, it’s important to provide one promptly to avoid delaying the application process.
How to Write a Sample Letter of Explanation
When composing your letter of explanation, follow these guidelines:
1. Include identifying information
- Date of writing
- Lender name, address and phone number
- Your full name and mortgage application number
This ensures the letter gets matched up with your application file.
2. State the purpose in the first paragraph
Briefly explain that you are writing the letter at the lender’s request to provide an explanation about a specific issue or concern.
For example:
“I am writing this letter of explanation at your request to clarify the 60-day gap in my employment history in 2019.”
3. Provide details about the issue
In the body of the letter, go into detail about the background of the issue the lender flagged. Be specific and focus only on the details the underwriter requested.
For any dates, dollar amounts or account numbers, double check that you list the correct numbers. Supporting documents can help back up your explanation.
4. Explain how you resolved or plan to resolve the issue
Don’t just focus on the past issue, but also reassure the lender that it has been or will be resolved. This helps demonstrate you can manage your finances responsibly going forward.
For example:
“I have since started my new job and have been employed there steadily for the past 18 months. My income has remained consistent and I do not anticipate any further employment gaps.”
5. Close with contact information
At the bottom, sign your full legal name as it appears on your mortgage application. Type or print your name below along with your primary phone number and mailing address.
6. Proofread carefully
Be sure to thoroughly proofread your letter before submitting it. Double check for any spelling, grammar or punctuation errors. You want the letter to be as clear and professional as possible.
Sample Letter of Explanation Template
To see how this all comes
What is a letter of explanation for a mortgage?
A letter of explanation is your opportunity to explain inconsistencies in your mortgage application and any aspects of your financial history that your lender needs to better understand before it can approve you for a loan.
After you apply for a home loan, your application goes through the underwriting process. The underwriter takes a detailed look at your credit history, employment, tax returns, assets, and debts to make sure the information is complete and accurate and shows you to be at low risk of defaulting on the loan.
If something turns up that could disqualify your application, the underwriter might ask for a letter of explanation to help better understand the specific details of the issue.
Tip: The underwriter will check your credit scores, employment, and other information again shortly before finalizing the loan. Any changes that have occurred since the loan was approved could require an explanation before the lender will clear your loan to close. So it’s best not to make any changes to your finances until you’re done with the homebuying process.
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Keep it brief
The underwriter wants to see all the information they need to understand the issue, but that’s all they want to see. Keep your explanation brief, specific, and to the point.
LOE – Letter of Explanation
FAQ
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