Letter of explanation for a mortgage: Learn how to write one

It's standard practice to include copies of important financial documents during the mortgage application process. Documents such as bank statements, tax returns, and credit card statements can help your lender determine whether you can afford monthly mortgage payments. 

But in some cases, during the underwriting process, a lender may need more information. When this happens, the lender may ask for a letter of explanation (LOE).

A letter of explanation is a brief document that provides further clarity on a specific aspect of your financial history. It helps to address any concerns that your mortgage lender may have and could help you get approved for a home loan. 

What is a letter of explanation?

A letter of explanation, also called an LOE, is a document that hopeful prospective homebuyers write to a lender to provide additional context about their financial history. 

If additional questions related to your financial history arise during the underwriting process, such as a recent large deposit in your bank account, your lender may ask you to write a letter of explanation and submit supporting documentation to clarify the situation. 

This document enables you to provide additional details about your financial history. If your lender requests that you write a letter of explanation, don't be alarmed. It's standard practice in situations when your application paperwork alone doesn't provide a complete picture of your financial history.  

Submitting a letter of explanation for a mortgage can help to streamline the mortgage process. Choosing the right lender can also help streamline the application process. Better offers a fast, online mortgage application process, and pre-approval can take as little as three minutes.  

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Why do you need a letter of explanation?

Not all applicants are required to write this letter. However, if your lender needs further context about your financial history, you may be asked to submit additional information. Here are several reasons why a lender might ask you to write a letter of explanation for a mortgage: 

A recent job change or employment gap

If you have a new job or an employment gap, your lender may ask you to explain the situation and demonstrate that you can afford to make your mortgage payments in your current financial state. If you're concerned about your ability to afford a mortgage payment with your current income, talk to your lender about your options. 

A recent credit inquiry or a high credit card balance

A recent credit inquiry on a credit account due to opening a new credit account or a high credit card balance may impact the interest rate you qualify for when applying for a home loan. Your lender may request an explanation for credit inquiries or a recent high credit card balance. 

A history of late or missing payments

Late payments on your credit report can negatively impact your credit score and affect your interest rate for a home loan. If you have a history of late or missed payments, your letter should explain your reasoning and outline the actions you have taken to stabilize your finances. 

An unusual movement of funds

If there has been a movement of funds in or out of your bank account that is inconsistent with your account history, you may be asked to write a letter of explanation. 

Your lender may seek further clarification for atypical transactions based on your account history, such as a large deposit or withdrawal from a bank account. For example, if you were given money for a down payment as a gift, you’ll need to explain it in a gift letter. 

Inconsistent income

Not all workers receive a consistent paycheck every two weeks. If you work a seasonal job, have a commission-based job, perform gig work, or are self-employed, your income may be inconsistent. Your lender may request additional clarification about income fluctuations.

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What should be included in a letter of explanation?

Here are some elements to include in your letter of explanation for a mortgage loan: 

– The date 

– The lender’s name, address, and phone number 

– A subject line that includes your name and loan application number 

– A short statement summarizing the issue 

– An explanation for what happened

– An overview of what you have done or plan to do to resolve the issue 

– Supporting documentation that backs up your claims 

– Your name, partner or spouse’s legal name (if applicable) current address, email address, and phone number 

– A polite closing 

How to write a letter of explanation for a mortgage

Ready to write a letter of explanation for a mortgage? Here are the steps to take: 

Be professional

Your letter doesn’t need to be fancy, but it should be professional. Approach your letter similarly to how you’d write a cover letter for a job, not a text message to a close friend. 

Explain the citation honestly and be brief

Give an honest explanation, but avoid including unnecessary details. Aim to be brief and concise. 

Include relevant supporting documentation

Attach documentation that supports your explanation. 

Reiterate your current financial stability

Your letter should also highlight improvements you’ve made to address the situation and improve your finances. Be sure to highlight your current financial stability. 

You should also reassure them that you can afford to pay your home loan. You can use a calculator to estimate your monthly mortgage payments.

Thank them for their consideration

At the end of the letter, thank them for considering your application. You should also include a polite closing and sign your name. 

Do a final review

Proofread your letter before submitting it to your lender. It can also be helpful to read your letter out loud so you catch minor mistakes. 

Letter of explanation example

Here’s a letter of explanation example to help guide you in creating your own letter: 

Date

Name of lender 

Address of lender 

Lender phone number 

Re: [your name] mortgage application #[application number]

To whom it may concern:

Please find this letter as an explanation for my employment gap from November 2024 to March 2025. 

I was let go from my job due to corporate downsizing. I spent this time looking for a new job. I accepted an offer for a full-time position with my current employer in March 2025. 

I have attached the employment offer from my current employer, along with copies of my first and most recent pay stubs. 

My current salary is sufficient to cover my mortgage payments and other financial responsibilities.

Thank you for your time and consideration.

Regards, 

Your name (and co-borrower’s name if applicable) 

Your current address

Your phone number

Your email address  

What happens after you send a letter of explanation

It may take several days to hear back after sending a letter of explanation. Your lender may request further clarification or documentation after receiving your letter. Be sure to follow up quickly to avoid further delays.

One potential result is your lender approving your application for a mortgage. 

If your lender rejects your letter, don’t give up hope. You can ask them why your letter was rejected. Then you can revise your letter of explanation and submit a new one. 

Alternatively, you could work with a different lender. It may be beneficial to review your finances and take steps to improve your current situation before applying for a mortgage again. 

Letter of explanation FAQs

Here are some answers to commonly asked questions related to letter of explanation requests: 

What is a late payment letter of explanation?

An explanation letter for late payment is a brief, formal document that a mortgage applicant sends to a lender to explain the reason for a missed or late payment on a loan or credit account. The letter should provide a clear explanation, offer context for the situation, and outline the steps you have taken to resolve the issue. 

Do I always need a letter of explanation?

No, a letter of explanation isn't always required by lenders. A letter of explanation is only necessary if a mortgage underwriter asks for clarity about your financial situation. 

What's the ideal length for an LOE?

Your letter of explanation should be brief. There's no official length, but aim to keep your explanation of the situation short and to the point. 

Do I need to submit documents with a letter of explanation for a mortgage?

If you have documentation that supports your clarification, include it with your letter. 

A letter of explanation could improve your chances of approval

It's your lender's job to make sure you can afford your monthly mortgage payments. Certain events or situations in your financial history could trigger the need for a letter of explanation. 

This document gives you an opportunity to explain the situation and the steps you've taken to improve your finances. Ready to write an LOE? 

The best approach is to be brief, honest, and direct. In your letter of explanation, provide a reason for your situation, explain what you've done since the event or situation occurred, and include documentation that backs up your claims.

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