What Is a Letter of Explanation for a Mortgage?

A letter of explanation for a mortgage, also called an LOE, is a written document a borrower submits to their lender upon request during the underwriting process to clear up potential red flags, such as gaps in employment history or a previous bankruptcy.

When you apply for a mortgage, your lender reviews your financial information to assess your income, debts, assets, employment status, credit history, and identity. These documents are essential to the underwriting process to help determine your lending risk and borrowing power. If any discrepancies show up during your assessment, your lender may also ask you to provide a letter of explanation.

A letter of explanation could be the deciding factor that gets you the mortgage you need. However, you should only submit a letter if your lender requests it. Before applying for a loan, consult with one of our loan officers here at Zillow Home Loans* for mortgage application advice.

Why do I need a letter of explanation for a mortgage?

There can be many reasons why a lender might ask for a letter of explanation. Let’s say you have recent debt consolidation activity. In that case, your lender may want to know what led to those circumstances, why you chose to consolidate your debt, and how it’s positively impacting your current financial situation.

Here are some of the most common reasons for needing to write a letter of explanation for a mortgage:

• Derogatory remarks on your credit report, such as late payments, collections accounts, or a history of missed payments
• Changes in employment, whether it be a recent job change or significant gaps in employment over the past two years
• Hard inquiries on your credit report, which may indicate you’re applying for too much credit at once or being denied credit from multiple agencies
• Bankruptcy within the past seven to 10 years
• Having non-traditional income, such as a commission-based salary or being self-employed
• Major transactions, including both withdrawals and deposits, with an unclear source
• A large down payment source that you haven’t provided a gift letter for
• Being a co-signer on another loan can impact your debt-to-income ratio (DTI), even if the loan is in good standing
• High student loan debt, which also affects your DTI
• Recent debt consolidation activity
• Significant losses on your recent tax returns
• Inconsistent housing history, such as frequent moves, short-term rentals, or a lack of rent-payment history due to living rent-free

Remember, these things aren’t necessarily deal-breakers and likely won’t keep you from getting mortgage approval. The key is to address any potential concerns proactively and provide context for the circumstances that apply to you in a way that demonstrates your financial responsibility and ability to manage a mortgage.

How to write an explanation letter

Your lender will advise you on how to write a letter of explanation for a mortgage, if requested. Letters of explanation are generally concise, and resolve a specific lender concern based on your mortgage application. Your letter of explanation may explain what is being resolved, how it was resolved, or steps you’re taking to prevent it from happening. 

The information included in a letter of explanation will vary depending on your unique situation. If asked to write a letter of explanation, your lender will typically provide you with a template.

What to do if your letter of explanation is rejected?

If your lender rejects your letter of explanation, you still have options. First, speak with your lender to ask for clarification regarding why they rejected the letter, and ask if you can submit a second letter. From there, you can revise your initial letter or write another one, providing any additional information the lender needs to understand your financial circumstances.

If a second letter doesn’t work, you may want to consider your other options, such as working with a different lender or exploring alternate mortgage loans. You may also want to review your current financial situation to see where you can make improvements before applying for another mortgage loan.

If you’re concerned about being approved for a mortgage, consider speaking with a mortgage expert to discuss your loan options and start your home-buying journey without unnecessary stress. You can find a professional through our lender directory or speak directly with one of our loan officers here at Zillow Home Loans*. 

*An equal housing lender. NMLS #10287