Why You Need a Letter of Explanation for Your Mortgage
Securing a mortgage often requires more than just a good credit score. Lenders scrutinize every aspect of your financial history, from credit report discrepancies to unusual bank deposits. A well-written letter of explanation (LOE) provides context for potential red flags, reassuring lenders and increasing your chances of approval. These letters help clarify inconsistencies or unusual activity that might otherwise raise concerns, demonstrating your transparency and responsibility.
This article provides 15 sample letters of explanation for various situations that might arise during the mortgage application process. Each sample is a template that you can adapt to your specific circumstances. Remember, honesty and clarity are crucial. Provide accurate information and address any concerns directly. Tailor your letter to the specific lender’s requirements, referencing the specific document or transaction they are inquiring about.
Common Scenarios Requiring an Explanation Letter
Several situations commonly require a letter of explanation during the mortgage process. These include addressing credit report inaccuracies, explaining gaps in employment, clarifying large or unusual deposits, and justifying past financial hardships. Failure to provide adequate explanations can lead to delays or even denial of your loan application.
By addressing these issues proactively with a clear and concise letter, you can demonstrate your understanding of the lender’s concerns and provide the necessary information to resolve them. Remember to keep your letter professional, factual, and to the point. Support your explanations with documentation whenever possible.
15 Sample Letters of Explanation for Mortgage Loans
Sample 1: Explanation for Late Payment
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender’s Name]
[Lender’s Address]
Subject: Explanation for Late Payment on [Account Name]
Dear [Loan Officer Name],
This letter is to explain a late payment on my [Account Name] account, which occurred on [Date of Late Payment]. The payment was [Number] days late due to [Brief explanation of reason for late payment, e.g., unexpected medical bill, job loss].
I understand the importance of timely payments and have taken steps to ensure this does not happen again. I have [Describe actions taken, e.g., set up automatic payments, created a budget]. I value my credit standing and am committed to maintaining a good payment history.
Thank you for your consideration.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 2: Explanation for Credit Inquiry
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender’s Name]
[Lender’s Address]
Subject: Explanation for Credit Inquiry from [Creditor Name]
Dear [Loan Officer Name],
This letter is to explain a credit inquiry on my credit report from [Creditor Name] on [Date of Inquiry]. This inquiry was related to [Explain the reason for the inquiry, e.g., shopping for car insurance, pre-approval for a credit card]. I did not open an account with [Creditor Name].
I am happy to provide further information or documentation if needed.
Thank you for your time.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 3: Explanation for Gap in Employment
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender’s Name]
[Lender’s Address]
Subject: Explanation for Gap in Employment
Dear [Loan Officer Name],
This letter is to explain a gap in my employment history between [Start Date] and [End Date]. During this time, I was [Explain the reason for the gap, e.g., taking care of a family member, pursuing further education, searching for a new job]. I was actively [Describe what you were doing during this time, e.g., volunteering, taking courses, attending job fairs].
I have since secured employment with [Current Employer Name] on [Start Date of Current Employment] and am committed to my role.
Thank you for your understanding.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 4: Explanation for Large Deposit
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender’s Name]
[Lender’s Address]
Subject: Explanation for Large Deposit on [Date]
Dear [Loan Officer Name],
This letter is to explain a large deposit of [Amount] into my [Bank Name] account on [Date]. This deposit was from [Source of the funds, e.g., gift from family, sale of personal property, tax refund]. I have attached [Supporting documentation, e.g., gift letter, bill of sale, tax return].
These funds will be used for [Intended use, e.g., down payment, closing costs].
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 5: Explanation for Address Discrepancy
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender’s Name]
[Lender’s Address]
Subject: Explanation for Address Discrepancy
Dear [Loan Officer Name],
This letter is to clarify an address discrepancy on my credit report. The address listed as [Incorrect Address] is incorrect. My current and correct address is [Your Correct Address]. I have resided at this address since [Date].
I can provide documentation, such as utility bills or driver’s license, to verify my current address.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 6: Explanation for Charge-Off
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender’s Name]
[Lender’s Address]
Subject: Explanation for Charge-Off on [Account Name]
Dear [Loan Officer Name],
This letter addresses the charge-off on my [Account Name] account, which occurred on [Date]. At that time, I was experiencing [Explain the circumstances that led to the charge-off, e.g., job loss, medical emergency].
Since then, I have [Describe what you’ve done to improve your financial situation, e.g., secured a new job, established a budget, started a payment plan]. I understand the impact of this charge-off and am committed to rebuilding my credit.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 7: Explanation for Collection Account
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender’s Name]
[Lender’s Address]
Subject: Explanation for Collection Account with [Collection Agency Name]
Dear [Loan Officer Name],
This letter is to explain the collection account with [Collection Agency Name] for [Original Creditor Name]. The original debt was for [Reason for the debt, e.g., medical bill, utilities].
[Choose ONE of the following options and use it. Delete the others]
* Option 1 (Paid): This collection account has been paid in full. I have attached proof of payment.
* Option 2 (Dispute): I am currently disputing this collection account with [Collection Agency Name] because [Reason for the dispute]. I have attached documentation supporting my dispute.
* Option 3 (Negotiating): I am currently in the process of negotiating a payment plan with [Collection Agency Name].
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 8: Explanation for Co-signed Loan
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender’s Name]
[Lender’s Address]
Subject: Explanation for Co-signed Loan for [Borrower’s Name]
Dear [Loan Officer Name],
This letter is to explain that I co-signed a loan for [Borrower’s Name] on [Date] with [Lender Name]. [Borrower’s Name] is [Relationship to you, e.g., my son, my brother].
[Borrower’s Name] is solely responsible for this loan and has been making timely payments. I do not contribute to the payments, and I do not benefit financially from this loan. I have no reason to believe that [Borrower’s Name] will default on this loan.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 9: Explanation for Assets Held in Another Country
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender’s Name]
[Lender’s Address]
Subject: Explanation for Assets Held in [Country Name]
Dear [Loan Officer Name],
This letter is to explain that I hold assets in [Country Name] with [Bank Name]. These assets consist of [Type of assets, e.g., savings account, investment account] and have a current value of [Amount].
These funds are [Explain the source of the funds, e.g., inheritance, savings from previous employment]. I can provide documentation from [Bank Name] to verify the existence and value of these assets. These funds [Are/Are not] readily accessible and transferable to the United States. If transferable, the process takes approximately [Number] days.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 10: Explanation for Recent Job Change
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender’s Name]
[Lender’s Address]
Subject: Explanation for Recent Job Change
Dear [Loan Officer Name],
This letter is to explain my recent job change. I started working at [New Employer Name] on [Start Date], replacing my previous position at [Previous Employer Name], where I worked from [Start Date] to [End Date].
My new role at [New Employer Name] is [Briefly describe your new role] and my annual salary is [Salary]. This position is in the same field as my previous role and represents a [Increase/Decrease] in compensation and [Increase/Decrease] in responsibility. I anticipate long-term stability in this new role.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 11: Explanation for Self-Employment Income Fluctuations
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender’s Name]
[Lender’s Address]
Subject: Explanation for Self-Employment Income Fluctuations
Dear [Loan Officer Name],
This letter is to explain the fluctuations in my self-employment income. As a [Your Profession], my income is subject to seasonal variations and project-based work. While there may be months with lower earnings, my overall income has remained stable and strong over the past two years.
Specifically, [Explain the reason for any significant income drops during the past two years. Be specific and factual]. I am confident that my business will continue to thrive and generate sufficient income to meet my financial obligations. I can provide additional financial statements if needed.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 12: Explanation for a Gift of Equity
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender’s Name]
[Lender’s Address]
Subject: Explanation for Gift of Equity
Dear [Loan Officer Name],
This letter explains the gift of equity I am receiving from [Donor’s Name]. [Donor’s Name] is [Relationship to you, e.g., my parents]. [Donor’s Name] is providing me with [Amount] in equity from the property located at [Property Address].
This gift of equity will be used toward my down payment on the property I am purchasing. This is a true gift, with no expectation of repayment. A gift letter from [Donor’s Name] is attached.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 13: Explanation for Foreclosure (Previous Hardship)
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender’s Name]
[Lender’s Address]
Subject: Explanation for Previous Foreclosure
Dear [Loan Officer Name],
This letter addresses the foreclosure I experienced on the property located at [Property Address] in [Year]. This occurred due to [Clearly and concisely explain the hardship that led to the foreclosure, e.g., major illness, job loss, divorce].
Since that time, I have [Describe the steps you’ve taken to recover financially, e.g., secured stable employment, established a budget, improved credit score]. I understand the seriousness of foreclosure and have learned valuable lessons. I am now in a much stronger financial position and am confident in my ability to manage a mortgage responsibly.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 14: Explanation for IRS Tax Lien
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender’s Name]
[Lender’s Address]
Subject: Explanation for IRS Tax Lien
Dear [Loan Officer Name],
This letter explains the IRS tax lien that appears on my credit report. The lien stemmed from [Year]’s tax return, due to [Explain the reason for the tax debt].
[Choose ONE of the following options and use it. Delete the others.]
* Option 1 (Paid): This tax lien has been paid in full. I have attached documentation from the IRS confirming the release of the lien.
* Option 2 (Payment Plan): I am currently on a payment plan with the IRS to satisfy this tax debt. I have attached documentation outlining the payment schedule.
* Option 3 (Dispute): I am currently disputing this tax lien with the IRS, as I believe it is inaccurate. I have attached documentation supporting my claim.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 15: Explanation for Limited Credit History
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender’s Name]
[Lender’s Address]
Subject: Explanation for Limited Credit History
Dear [Loan Officer Name],
This letter is to explain my limited credit history. I have not used credit extensively in the past because [Explain the reason for the limited credit, e.g., preferred to pay with cash, only recently started building credit].
While my credit history may be limited, I have a strong history of responsible financial management. I have consistently paid my bills on time, and I have a stable income. I can provide bank statements and other documentation to demonstrate my financial responsibility.
Sincerely,
[Your Signature]
[Your Typed Name]
Conclusion: Crafting Effective Explanation Letters
A well-crafted letter of explanation is a powerful tool in navigating the mortgage approval process. By addressing potential concerns proactively and providing clear, honest explanations, you can increase your chances of securing your loan. Remember to tailor each letter to your specific circumstances, provide supporting documentation, and maintain a professional tone. These sample letters provide a solid foundation for creating compelling explanations that will help you achieve your homeownership goals.