Letter of Explanation

A Letter of Explanation (LOE) is a document requested by a mortgage lender during the mortgage application process to clarify discrepancies in a borrower's financial profile. It often addresses items in a credit report, such as late payments, credit inquiries, or unusual transactions in bank statements. The purpose of the letter is to provide the lender with a clear understanding of your financial history, making it easier for them to approve your loan application.

Common Reasons for Requesting a Letter of Explanation

1. Credit Report Discrepancies: If there are inconsistencies in your credit report—such as multiple credit inquiries or late payments—the lender may request clarification. For instance, a lender might ask you to explain why you opened multiple new credit accounts in a short period of time.
2. Employment History: Gaps in your employment history or a recent job change could raise red flags. Lenders want to know if your current job provides reliable income that will allow you to make your monthly payment on time.
3. Bank Account Activity: Unusual deposits or withdrawals in your bank accounts could prompt an explanation request. If you received a large deposit, for example, the lender might want to ensure that the funds are legitimate and not from a loan that would add to your debt obligations.
4. Missed Payments: If you've had missed payments on a car loan, mortgage, or any other credit account, the lender may request a letter explaining the circumstances that led to those missed payments. Providing context can help the lender understand if it was a one-time issue due to an unexpected event.
5. Address Discrepancies: Differences in the mailing address on your application compared to other financial documents, such as your tax returns or bank statements, could trigger a need for clarification.

How to Write a Letter of Explanation

A well-written Letter of Explanation should address the issue clearly and provide supporting evidence if needed. Here's how to structure your letter:

1. Header Information: Include your name, current mailing address, the lender's information, and the loan application number.
2. Body of the Letter:
   • State the Issue: Begin by identifying the issue, such as a credit account discrepancy or missed payment.
   • Provide an Explanation: Explain why the issue occurred. For instance, if you had an employment gap, mention if it was due to a job transition or medical bills.
   • Supporting Documents: Attach any relevant financial documents that help explain the situation, such as bank statements, pay stubs, or a gift letter if the funds for your down payment came from a family member.
   • Reassure the Lender: Emphasize that the issue is resolved and you’re in a better financial position. Mention improvements, like an improved credit score or consistent on-time payments since the issue occurred.
3. Conclusion: Reaffirm your commitment to providing any additional documentation and express your appreciation for their understanding.

Final Tips for Writing a Letter of Explanation

• Be concise and honest: Keep the letter brief but thorough. Lenders appreciate clarity.
• Provide evidence: Attach any supporting documentation to validate your explanation.
• Maintain a professional tone: Address the lender formally and ensure the letter is free from grammatical errors.

Closing thoughts:

A Letter of Explanation is a crucial part of the mortgage application process when discrepancies arise in your financial history. Whether you're addressing issues related to your credit report, bank accounts, or employment history, this letter gives you an opportunity to provide context and help the lender understand your situation better. By being clear, honest, and providing the necessary supporting documents, you can improve your chances of loan approval.

Sample Letter of Explanation:

[Your Name] [Your Address] [City, State, ZIP] [Date] [Mortgage Lender Name] [Mortgage Lender Address] [City, State, ZIP]

Loan Number: [Your Loan Number]

Dear [Lender's Name],

I am writing to explain the recent inquiry on my **credit report** related to a **new credit account**. This inquiry was due to an application for a **home loan**, which was necessary for my commute to work. Since opening the account, I have maintained consistent **on-time payments** and have not incurred additional debt. Attached are **bank statements** and the **loan statement** for further verification.

Please let me know if any additional **supporting documents** are required. Thank you for your understanding, and I look forward to completing the **mortgage loan** process.

Sincerely,[Your Name]

*Consult with a financial professional for personalized advice.