How to Write a Letter of Explanation (2024)

When you apply for a mortgage, you will need to provide several financial statements, including bank statements, pay stubs, tax returns, and credit card information, among other things.

In some cases, lenders may require additional information to ensure the borrower can repay the mortgage for which they are applying. The intention of a ‘Letter of Explanation’ is to provide more insight into certain areas of the borrower’s loan application, including:

• Showing how the borrower is obtaining the money for the down payment and/or closing costs
• Confirming whether the borrower recently opened any new credit accounts
• Clarifying any discrepancies on the borrower’s credit report
• Explaining any credit blemishes such as serious delinquencies, bankruptcy or foreclosure

A letter of explanation enables the borrower to answer any questions a lender might have about the loan application. The letter should come directly from you (the borrower) and should align with any documentation provided. In certain circ*mstances, supporting documentation may be necessary. This letter and supporting documentation will give the underwriter (who finalizes the loan) all the documentation they need while reviewing your application.

Lenders are often required to get letters of explanation for certain loan application issues, such as uncomplimentary information on your credit report, including delinquencies, late payments, bankruptcies, and foreclosures.

Additionally, there are guidelines set by organizations that back or buy mortgage loans, such as the U.S. Department of Agriculture, U.S. Department of Veterans Affairs, Federal Housing Administration, or Fannie Mae and Freddie Mac. These organizations may require specific additional information.

Mortgage lenders may require Letters of Explanation for certain application-related requirements or to further understand areas of the application that may not be apparent. These areas typically have to do with income, employment, or credit, with requirements generally set by organizations that back or buy mortgage loans.

Late or Missing Payments

If you have made late payments or have missed payments, the lender will want to understand why. The reason may not have been in your control, such as a medical reason or unemployment. If you typically pay on time, indicate as such.

Inquiries from other Lenders

Inquiries from other lenders may indicate that you have opened a new credit account, which could affect your ability to repay the mortgage obligation. If you have opened a new account, provide documentation to show the balance and monthly payment so it is not a surprise just prior to closing.

Employment Changes and Gaps

If gaps between jobs or long-term unemployment have impacted your ability to repay your obligations, explain the situation and why it won’t happen again.

Perhaps the employment gap was an anomaly. For example, many workers who had a great employment record were laid off during the COVID pandemic through no fault of their own. Provide all the details about your specific scenario and documentation to support your explanation if possible.

Motivation for moving or purchasing an additional property

Lenders have good reasons to know why you want to buy a house. Will it be your primary residence? If so, why are you interested in the property? Will it be a vacation home? If you are buying a second home so it can be rented?

By explaining your situation, the lender will be able to make the correct assessment of your needs.

Just like any business letter that you write, the Letter of Explanation should be clear and to the point. While the content of the letter will change depending on your situation, there are a few important aspects to include:

• Provide all details the best you can, including correct dates and dollar amounts
• Explain how and when all situations were resolved. If they are not resolved, explain that as well
• Detail why problems won’t happen again

Remember, only you know your situation well enough to explain it. Do not have someone else write the letter for you.

Below are a few aspects you will want to include in your letter:

• Your name, mailing address, and phone number
• The date
• The loan application number
• The lender’s name, mailing address, and phone number
• Your explanation, along with references to any supporting documents you are including

Remember to include copies of all documentation along with your letter before you send it in the mail.

Letter of Explanation Sample

Below is a sample letter. In general, be concise and stick to the facts.

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Your name

Current address

City, State, and Zip Code

Date

Re: Mortgage application (number)

Dear Mr. or Ms. (name of person requesting the letter of explanation),

This letter explains the item you asked about on my credit report.

Late payment to (name) Bank (for car loan) dated 02/15/2021

Due to COVID restructuring at my former employer, I was laid off from my job in January 2021 and was unable to make my $550 February car payment. Fortunately, I found a new job in late February, and I made up the back payment and late fee.

I fully understand the responsibility of taking on a mortgage and plan to make all my payments in full and on time. I sincerely hope you will consider approving my application.

Sincerely,

(signature)

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All lenders want to make sure that you’re in the best possible position to take on the financial responsibility of a mortgage. That is why this letter will be thoughtfully reviewed with everyone’s best interest in mind.

If the lender asks for more details or information, provide it in a timely manner.

If your loan is rejected, the lender will provide you with an adverse action notice, which will provide the reasons for denial. If this were to happen, you could consider working with another mortgage lender, or you may want to resolve any issues that were raised by the lender. Doing this may give you a better chance of approval in the future.