Letter of Explanation

What is a Letter of Explanation?

A letter of explanation is a short letter a mortgage borrower writes when the underwriter asks about something in the loan file: a recent credit inquiry, a late payment, a gap in employment, a large deposit, a different address or a name that does not match. It says what happened, when and why, shows that the matter is resolved, and lists the documents that prove it. Without a clear answer, the underwriter cannot finish the review, the loan conditions stay open, and the closing date can slip.

Underwriters ask for letters of explanation during mortgage underwriting, and sometimes again before closing, when something in the credit report, bank statements, pay records or application needs context. Typical requests cover inquiries from other lenders, late or missed payments, collections, gaps between jobs, a change of job or income, deposits that did not come from pay, overdrafts, several recent addresses, and names that differ across documents. The request usually reaches the borrower through the loan officer as a list of conditions, and each item may need its own letter. Lenders often shorten the name to LOE or LOX.

What needs explaining, and what proof is enough, depends on the loan program and the lender. Fannie Mae and Freddie Mac guidelines govern conventional loans, FHA, VA and USDA loans have their own rules, and lenders often add requirements of their own on top. These rules set, for example, what counts as a large deposit and how far back a late payment still matters. Some lenders also have their own letter of explanation form. Read the exact wording of each condition, and ask your loan officer if you are not sure what the underwriter needs to see.

A letter of explanation answers a question; it is not an appeal, a dispute, or a hardship letter asking for a loan modification. If an item on your credit report is wrong, dispute it with the credit bureau and with the company that reported it. The letter does not guarantee approval, and the underwriter will still check what you say against your documents. Everything in it must be true and consistent with your application, because false statements to a mortgage lender can be a federal crime.

What to put in a Letter of Explanation

These are the details this template asks for. Anything left blank is marked in red on the preview so you can see what is still missing.

How to write a letter of explanation

1. Answer exactly what the underwriter asked

   Read the condition word for word and answer that question only. If it names a specific inquiry, deposit or late payment, use the same dates, amounts and names in your letter. Choose the topic from the list in the form; it becomes the subject line, such as ‘Letter of explanation — a large deposit’. If the underwriter asked about several things, write a separate letter for each unless your loan officer tells you otherwise.

2. Head it with your details and the loan number

   Enter your name and current address as they appear on your loan application, and the date. Under ‘Lender’, give the lender’s name and the department, such as ‘Riverbank Mortgage, Underwriting Department’, and add the loan or application number so the letter is matched to your file. The letter opens ‘Dear Underwriter,’, which is the usual greeting when you do not know who will review it.

3. Say what happened, when and why

   In the explanation box, write one short paragraph per line. Start with the facts: what happened, the dates, the amounts and the names of any creditors, employers or buyers involved. Then give the reason in a sentence or two, such as a car loan you decided against, a hospital stay, a billing mix-up or the sale of a car. Stick to facts, keep the tone neutral, and leave out anything the underwriter did not ask about.

4. Show it is resolved and will not recur

   End your explanation with where things stand now: no new account was opened, the account has been current since, you have been in your new job since a given date, or the deposit came from a one-time sale. If you changed something to prevent a repeat, such as setting up automatic payments, say so in a sentence. Underwriters are looking for a one-off with a clear end, so let the facts and documents show it.

5. Attach proof, sign and keep a copy

   List each document you are attaching on its own line, such as a bill of sale, a letter from a creditor, an offer letter or a bank statement; the letter prints them under ‘I have attached’. Read it once more for dates and amounts, sign it, and upload or send it the way your loan officer asks. Keep a copy, and answer any follow-up quickly so the condition can be cleared.

Letter of explanation examples

Three sample letters for common requests: a large deposit, a gap in employment and a credit inquiry. The first shows the whole letter as the form prints it; the other two start at the subject line.

Common mistakes

• Explaining things the underwriter did not ask about opens new questions and new conditions, and can delay a closing that was otherwise on track.
• Giving a vague answer such as ‘it was a mistake’, with no dates, amounts or names, usually brings a second request and costs days you may not have.
• Sending the letter without the documents that back it up leaves the underwriter unable to verify it, so the condition stays open.
• Writing dates or amounts that do not match your bank statements or credit report makes the explanation look unreliable, even when the story is true.
• Opening a new credit card or financing furniture while the loan is in underwriting adds fresh inquiries to explain and can change whether you still qualify.

Frequently asked questions

This page explains general practice and is not legal advice. Requirements differ between countries and, in some cases, between states — check what applies where the document will be used.

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