Credit Inquiry Concerns? How to Write a Strong Explanation Letter

A letter of explanation for credit inquiries is a short document written by a borrower that explains recent hard inquiries (also called “hard pulls”) on their credit report. While you might view checking a rate for a new car loan as harmless, mortgage lenders can consider multiple recent inquiries as a red flag that warrants further investigation.

If you’ve been asked to write an LOE, there’s no need to worry — it is a standard request. Here, we’ll cover everything you need to know, from reasons your lender may ask for one to guidelines on writing a good letter of explanation. We have also included a few examples and templates for LOEs.

What is a letter of explanation for credit inquiries?

A letter of explanation (LOE or LOX) is a formal document drafted in response to a mortgage lender’s request to clarify ambiguous or derogatory information in your financial history.

For example, an LOE can be used to explain significant employment gaps, past foreclosures, or large unexplained bank deposits.

A letter of explanation for credit inquiries specifically targets recent credit activity. If an underwriter sees multiple hard inquiries on your credit report, they may require an LOE to assess potential risk. Typically, they need to verify these details to ensure your financial data is current:

• The specific type of loan you applied for
• Whether those inquiries resulted in new, open accounts
• Whether there are new debts you’ve incurred that have not yet appeared on your credit report

The goal of an LOE for credit inquiries is to confirm you have not taken on a new loan that would affect your ability to repay a mortgage.

This is a fairly common request if you apply for a mortgage and have multiple hard inquiries on your file. If you are applying for a conventional loan or, especially, government-backed options like an FHA, VA, or USDA loan, you should be prepared to provide this clarification to meet standard underwriting guidelines around undisclosed debt.

How to write a letter of explanation for credit inquiries

Writing a good letter of explanation regarding credit inquiries requires a balance of transparency and conciseness. The underwriter isn’t looking for an elaborate story; they are simply looking for clear, verifiable facts they can use to calculate your risk.

Here are some tips on how to write a letter explaining credit inquiries:

1. Use clear headings and identifying details

Start with all your contact details: name, address, phone number, and email.

Next, date the letter and add the lender’s name and address.

If you have it, reference your loan application number or the address of the property you’re trying to purchase.

2. List each inquiry the lender asked about

List the inquiries exactly as they appear on your credit report.

If you are explaining three or more inquiries, use bullet points or a table — this will make it easier for an underwriter to check off each item against their list.

For each inquiry, make sure to include:

• Date of inquiry: The date listed on your credit report
• Name of creditor: The financial institution or lender
• Reason for application: Specific purpose, such as mortgage rate shopping, auto loan preapproval, or a retail credit card offer
• Outcome: State clearly whether a new account was opened. If yes, disclose the current balance and the monthly payment amount. If the new account is deferred or has no current balance, note that as well.

3. State clearly if no new debt occurred

If an inquiry did not result in a new account, state this explicitly. This will show your underwriter that your debt-to-income (DTI) ratio remains unchanged.

4. Be concise and factual

Underwriters review many files each day. Don’t get personal; just stick to the hard facts. Give a one- or two-sentence explanation for each inquiry, answering the lender’s question directly.

Keep the tone strictly professional and avoid defensive or over-apologetic language. If some inquiries reflect poor choices, take responsibility, but emphasize what changed (for example, the loan was paid off, or you closed the account).

5. Attach supporting documentation

For any claim, be sure to attach the proof. If you claim an account is closed  or that a balance is paid off, attach a statement or a letter from that creditor verifying it.

As a rule, don’t make claims you cannot back up with paper. Screenshots or PDFs of online statements typically work as long as they clearly show your name, the creditor, and the relevant balance or status.

6. Close politely and professionally

At the end of your letter, thank the underwriter and restate your commitment to on-time payments.

Remember that an LOE is a formal legal document, so you must sign it with your legal name (for most lenders, an eSignature would work) and date it to ensure validity.

Why do lenders care about recent credit inquiries?

To a mortgage lender, a cluster of recent credit inquiries is a red flag for risk. Underwriters scrutinize these inquiries primarily to protect against undisclosed debt.

Because there’s a lag time between opening a new account and it appearing on your credit report (sometimes up to 30 days), lenders often assume the worst until proven otherwise.

Specifically, lenders view multiple recent inquiries as possible signs of:

• Financial stress: A pattern of behavior suggesting you’re seeking extra cash or credit cards just to stay afloat
• New liabilities: New debts that haven’t been posted yet could change your debt-to-income ratio
• “Payment shock”: The risk that a new monthly obligation (a new car payment on top of a possible mortgage) will make the loan unaffordable

How credit inquiries affect your mortgage approval 

When evaluating your application, lenders first distinguish between soft pulls and hard pulls. Soft inquiries (such as an employment background check or checking your own score) do not affect your creditworthiness. However, hard inquiries — for example, applying for a new credit card — can affect your credit score and the underwriter’s final decision.

From a scoring perspective, the damage is usually minimal. According to FICO,[1] a single hard inquiry typically lowers a credit score by less than 5 points. However, the impact may be steeper for those with a short credit history.

Regardless of the impact on your score, the underwriter’s primary role is to keep your DTI ratio in check. So, they must confirm whether any of the recent inquiries resulted in new loans or accounts.

If a recent inquiry led to a new monthly payment that’s not listed on the report yet, that could push your DTI over the limit, potentially jeopardizing your loan approval.

Sample letters of explanation for credit inquiries

If you’re unsure how to format your response, having a clear starting point can help you draft a letter for your situation. Here are some template LOEs for mortgage lenders, including rate shopping and opening new accounts.

Supporting documents to include with your letter

A letter of explanation alone is not enough for your underwriter. A letter offers context, but physical documents provide the verification underwriters typically require. To speed up the process and avoid back-and-forth with your lender, proactively attach relevant proof for every inquiry you explain.

The exact documents will depend on your situation and the type of inquiry. However, here’s a common list of what you may need to include:

• Adverse action notice: The official denial letter if your application was rejected.
• Recent billing statement: Showing the current balance and minimum monthly payment for any new accounts.
• Loan agreement: If a statement isn’t available yet, this document could verify the payment terms instead.
• Payoff letter: If you used a new loan to consolidate debts, this would prove your old accounts are settled.
• Police report or FTC affidavit: If an inquiry was a result of fraud or identity theft, these would serve as proof.

Remember: Underwriters trust documents more than stories. Submitting a clear paper trail upfront will eliminate guesswork and make your underwriting process easier for the lender.

What to do if your letter of explanation is not accepted

Sometimes an underwriter might reject your explanation despite your best efforts. Your next steps depend on why the lender rejected your explanation.

1. Your letter was not clear enough

Underwriters may reject an LOE because it’s too vague or disorganized. 

If the feedback suggests they don’t fully understand the nature of the inquiries or your explanation, try to rewrite the letter in a new format. For example, switch from paragraphs to a simple table.

❗Verify that you included all possible evidence and, if not, make sure to attach all relevant paperwork.

2. The lender rejected your reasoning

Sometimes the issue isn't the letter but your lender’s risk tolerance. Some lenders have internal rules that could be stricter than general guidelines.

What to do in this case? You could shop for a different lender — one with more lenient guidelines that might view the same inquiries differently. Alternatively, you can try lowering your DTI to offset any perceived risk from the recent credit pulls.

3. You need more time to improve your credit

In some cases, it might be best to let the inquiries age and work on your credit standing in the meantime. If you can delay your purchase by a few months, the impact of any inquiries will diminish.

Spend this time building a solid track record. A 6- to 12-month period of flawless on-time payments (and no new hard pulls) could prove to lenders that you can handle the load, making you a much stronger candidate when you reapply.

Other reasons lenders might request a letter of explanation

Recent credit inquiries are the most common issue for lenders. However, it’s not the only red flag that may trigger a request for a letter of explanation. If an underwriter spots anything that deviates from standard guidelines, they may come to you for more context. For example:

• Derogatory credit: Any late payments, collections, or significant events such as bankruptcy may require a detailed explanation. Your goal would be to prove these were isolated events in the past, not a habit of financial negligence.
• Employment gaps: Lenders value stability. If you have gaps in employment, or you recently changed industries or pay structure, be ready to demonstrate that your income is steady and reliable.
• Large bank deposits: To comply with anti-money laundering laws, lenders must verify the source of the funds. Also, they will want to know whether it’s a loan you’d have to repay.
• Address discrepancies: If the address on your ID or credit report does not match your application, an underwriter may ask for an LOE to clarify your actual residence history.
• Limited housing payment history: If you’ve been living rent-free with your family and then buy a house, you may need to explain the lack of any rental payment history to justify your ability to handle a mortgage payment.

The bottom line

Making sense of underwriting conditions like credit inquiries is easier with a pro on your side. A skilled realtor can help guide your timeline, ensuring you structure your home search around your credit strategy to maximize your approval odds. They can also help you find savings in other areas of the home search process to keep your budget on track.

Clever Real Estate can match you with local agents from top brokerages for free, with zero obligation. Connect with an expert today and start your homebuying journey with confidence.

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