Letter of Explanation for a Mortgage: How to Do It Right

What is a letter of explanation (LOE)? | See an example | How to write a good LOE | Why you might need one | What if your LOE doesn’t work? | FAQs

A letter of explanation for a mortgage helps you clear up creditworthiness questions and concerns that may arise after applying.

Loan underwriters are required to investigate issues and anomalies on your credit or employment background to ensure you can and will pay your mortgage. If they find negative or unclear information when processing your mortgage application, they may ask you for a letter of explanation.

When you draft a letter of explanation, be brief but thorough, sticking to the facts and including documentation as evidence.

What is a letter of explanation for a mortgage?

A letter of explanation (LOE or LOX) is a letter you draft in response to a mortgage lender’s request to explain ambiguous or derogatory information in your credit history, income background, or other application documentation.

When submitting your initial mortgage application, an LOE is an opportunity to explain your situation. For example, your lender may ask for an LOE if you have a foreclosure in your past, employment gaps, or a recent large bank deposit.

Tips for writing a good letter of explanation for a mortgage

Provide essential identifying information.

Start with all your contact details: name, address, phone number, and email. Next, date the letter and add the lender’s name and address. Reference your loan application number or the address of the property you’re trying to purchase.

Keep it brief and professional.

Don’t get personal, and just stick to the facts. Stay on topic and give a direct answer to the lender’s questions. Be careful not to overshare, or you may raise other concerns. One to three paragraphs are usually adequate, depending on the issue. Maintain a polite and professional tone.

Be honest and specific as possible.

Explain why you experienced the issue in question. Reassure the lender that you resolved the problem and detail how as briefly as possible. Provide dates, account numbers, dollar amounts, and any other pertinent facts and figures.

Include any supporting documentation.

Reference and include any documentation of what caused the problem and proof that you fixed it.

Close politely — and proofread!

In your closing, thank your lender for their time and include the following:

• Your full name as it appears on your loan application documents, printed and signed
• Your co-signer or co-borrower, if applicable
• Your closing date, if available

Read over the document carefully for errors. If you’re comfortable, ask someone you trust to review it for objectivity and a second pair of eyes.

Why you might need a letter of explanation for your mortgage

Anomalies in your financial history can be warning signs suggesting behavior that leads to loan defaults. Or they may be simple human error or issues you’ve already overcome. A mortgage underwriter’s job is to investigate issues with your:

• Credit report
• Address
• Housing payments
• Employment
• Banking activity

A letter of explanation allows you to correct misunderstandings. It also helps detail reasons that past problems won’t impact future mortgage payments.

However, there’s no guarantee that the underwriter will accept your explanation. Learn what to do if they reject your LOE.

Credit report issues

When you apply for a mortgage, lenders review a credit report from all three major credit agencies for things like your payment history, debt, and credit score.

Lenders want to see evidence of responsible financial behavior. But underwriters view the following issues on your credit report as red flags:

• Bankruptcy
• Charge-offs
• Late payments
• Foreclosure or short sale
• Judgments
• Collections
• Fraud alert
• Co-signed loans
• Many recent credit inquiries
• New debt

You can boost your approval odds and score a better rate when you clean up your credit as much as possible before applying for a mortgage.

» LEARN: How to get a mortgage when you have bad credit

Address discrepancies

Different addresses on your credit file, bank statements, and loan documents raise alarm bells. It may indicate identity theft, undisclosed real estate, or other potential fraud.

But if it’s just a clerical error or an address update oversight, you can clear it up with an LOE quite easily.

No housing payment history

At least a year (12 months) of rental or mortgage payment history helps lenders assess your housing payment pattern. But younger borrowers may not have that background if they’ve been living with parents, in a college dorm, or in another co-living situation where they weren’t on the lease.

Employment irregularities

Consistent, two-year work history in the same job or industry offers ideal approval odds. However, long periods of unemployment, frequently changing employers, or recently moving to a new field can be concerning for a lender. Self-employed workers and freelancers with fluctuating incomes may also face more scrutiny.

Lenders may also request an explanation if you’re moving to a new city or state, but your employment location isn’t changing. You and your employer may both need to draft letters confirming a remote work arrangement.

Unusual or erratic banking activity

Lenders like predictability. Regular work income deposits and a steadily growing savings account are indicators of reliable financial behavior. But overdrafts and large withdrawals or transfers between accounts can suggest financial stress. Unexplained deposits can also be problematic since the source is unknown and could indicate undisclosed debt.

You may also need to submit a letter of explanation if you have a joint bank account but are applying for a mortgage solo.

What to do if your letter of explanation doesn’t work

Your next steps depend on why the lender rejected your explanation.

If your first one didn’t clearly explain the problem or resolution

You might want to write a new letter, taking care to include all supporting documentation with the new draft.

For example, you may have explained that late payments were due to a COVID-19 pandemic layoff, but you didn’t provide the leave of absence paperwork. Or you failed to document that your new job allows you to work from home if another lockdown happens.

If your lender rejected your reasoning

If you went back to the same job you had when your finances took a hit, for instance, the underwriter may not be confident that future hardships won’t lead to late payments again.

You can:

• Try a different lender, potentially one with a less restrictive home-buying program
• Wait several months to start the process again. Waiting 6–12 months puts any late payments further in the past and gives you time to start rebuilding a good payment history.

You’ll likely still need to write a new LOE either way.

FAQ about a letter of explanation for a mortgage