Letter of Explanation

Yes. If an LOE is too vague, lacks supporting documentation, or reveals a new financial risk (like an undisclosed debt), the underwriter may ask for a revised letter or deny the loan. If your letter is rejected, ask your loan officer for specific feedback—often, you simply need to provide a more detailed timeline or a missing piece of evidence to satisfy the requirement.

Underwriters use the LOE to “tell the story” of your file to investors or government agencies (like the FHA or VA) who may eventually buy or insure the loan. They are looking for reassurance that any past financial trouble was an anomaly rather than a pattern of poor money management. A well-written LOE can be the deciding factor that turns a “Maybe” into an “Approved.”

Your letter should follow a standard business format:

• Header: Your name, address, phone number, and loan application number.

• Recipient: The lender’s name and the Underwriting Department’s address.

• Subject Line: Clearly state the topic (e.g., RE: Explanation of Credit Inquiry).

• The Body: One or two paragraphs clearly explaining the situation.

• Closing: A brief sentence thanking them for their time, followed by your signature and the date.

Keep it professional, honest, and concise. This isn’t an autobiography; it’s a business document.

• Be Factual: Include dates, dollar amounts, and account numbers.

• Be Brief: Stick only to the topic the underwriter asked about.

• Attach Proof: If you say you were sick, include a medical discharge summary. If you sold a car, include the bill of sale.

• Maintain a Professional Tone: Avoid overly emotional language or “sob stories.”

Lenders typically look for a steady two-year work history. If you have gaps longer than 30 or 60 days, you must explain what you were doing during that time. Common valid reasons include:

• Returning to school or seeking further education.

• Caring for a family member or a new child.

• Corporate downsizing or mass layoffs.

• Transitioning from self-employment back to a W-2 role.

Lenders generally cannot finance a primary residential mortgage if the property’s value is tied to a commercial farming operation. If your tax return (Schedule F) shows farm income or losses, you must provide an LOE stating that the farm is not located on the property you are currently buying. You should include the address of the actual farm property associated with that income.

Lenders use your rental or mortgage history to gauge your “payment shock”—how well you can handle a new monthly housing expense. If you’ve been living rent-free with family, you’ll need an LOE signed by the property owner. This letter should state how long you’ve lived there and confirm that you were not charged rent, explaining the lack of a paper trail for housing payments.

If your credit history shows late payments, a bankruptcy, or a foreclosure, you must explain the extenuating circumstances. Your letter should include:

• The specific date of the event.

• The name of the creditor and account number.

• A clear explanation of what happened (e.g., a medical emergency or divorce).

• Evidence that you have since stabilized your finances and that the issue is unlikely to recur.

Underwriters are required by federal regulations and internal risk policies to verify your ability to repay a loan. If they find an inconsistency—such as a large mystery deposit or a period of unemployment—they need documented proof that the issue was either a one-time event or has been fully resolved. The letter becomes a permanent part of your loan file, protecting both you and the lender.

A letter of explanation is a short, factual document provided by a borrower to a mortgage lender. Its purpose is to clarify specific items or “red flags” in your financial history that might otherwise cause an underwriter to pause or deny your application. It provides the “why” behind the numbers on your credit report, bank statements, or tax returns.