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

Written by Elizabeth BoydSeptember 14th, 20226 minute read

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.

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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.

Government-backed mortgages

Government authorities have a vested interest in making sure that lenders carefully vet borrowers before issuing mortgages. As such, they set standard underwriting requirements for specific mortgage approval concerns.

You might need to write an LOE if you're applying for a loan from:

  • Department of Veterans Affairs (VA)
  • Federal Housing Administration (FHA)
  • Federal National Mortgage Association (Fannie Mae)
  • Federal Home Loan Mortgage Corporation (Freddie Mac)

Even if you're not applying for a government-backed home loan, conventional lenders often follow Fannie Mae and Freddie Mac guidelines when approving borrowers.

July 30, 2022

Dear ABC Mortgages Loan Specialist:

I am writing to explain the $20,000 deposit in my Chase checking account (#44287) on 4/12/2022. I sold my 2002 Pace Arrow Class A motorhome on 4/11/2022 to Janice Brown. I owned it free and clear, with no liens. Enclosed, please find a copy of the bill of sale for $20,000. Please feel free to contact me by phone or email with any questions.

Thank you for your attention to this matter. I look forward to our closing on August 25, 2022.

Jane Borrower

(904) 555-1223

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:

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.

💡 Editor's tip
Don’t apply for additional credit, fall behind on bills, or default on any loans between initial approval and closing, or you could lose your home loan.

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.

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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

Draft a short, formal letter that clearly explains the issue your mortgage lender is questioning and how you fixed the problem. Back up all claims with documentation and details, like dollar amounts, dates, and account numbers.

The borrower writes the letter of explanation for a mortgage. However, some situations require an additional from another party to confirm your claims — like an employer, joint account holder, or former roommate.

Last-minute denials are possible. Your lender may deny the loan or send it back to underwriting if the final credit check reveals a credit score drop. Other buyer issues like asset verification or job loss can cause denial at closing. In addition, fraud, title problems, appraisal concerns, or other property disputes can also lead to a late rejection.

Lenders typically verify employment and run your credit score one final time before closing to be sure it hasn’t changed. Recent collections or credit accounts can hurt your score and, ultimately, your loan approval. So don’t apply for additional credit or fall behind on bills between initial approval and closing, or you could lose your home loan.

DO NOT try to hide a job loss during the home loan process — that's mortgage fraud. You’ll likely need to pause, delay, or cancel your loan until you can secure new employment. If you find a new job quickly or have other income sources, your lender may still approve you for the original loan or a smaller amount.