After you apply for a mortgage, the lender will evaluate your application and financial documentation to verify that you meet its requirements for loan approval.
If the lender finds information that raises red flags, it might ask you for a letter of explanation to shed light on the issue — whether it be a gap in employment, a derogatory mark on your credit, or an unusually large deposit in your bank account.
Here’s what you need to know about letters of explanation, including how to write one.
What is a letter of explanation for a mortgage?
A letter of explanation is your opportunity to explain inconsistencies in your mortgage application and any aspects of your financial history that your lender needs to better understand before it can approve you for a loan.
After you apply for a home loan, your application goes through the underwriting process. The underwriter takes a detailed look at your credit history, employment, tax returns, assets, and debts to make sure the information is complete and accurate and shows you to be at low risk of defaulting on the loan.
If something turns up that could disqualify your application, the underwriter might ask for a letter of explanation to help better understand the specific details of the issue.
Tip: The underwriter will check your credit scores, employment, and other information again shortly before finalizing the loan. Any changes that have occurred since the loan was approved could require an explanation before the lender clears your loan to close. So it’s best not to make any changes to your finances until you’re done with the homebuying process.
If you’re looking to purchase a new home, Credible can help you compare our partner lenders in just a few minutes. It’s simple and secure — and you don’t even have to leave our platform.
Why you might need a letter of explanation
Just about any aspect of your loan application can require a letter of explanation, but most requests have to do with credit, employment, cash reserves, or fraud protection.
Here are some items that might prompt your lender to request a letter of explanation:
Credit report issues
Past credit problems might prompt a request for a letter of explanation because they suggest you’ve had trouble managing your debt. These problems include:
- Late payments
- Collection items
- Charge-offs
- Bankruptcy
- A short sale or foreclosure
Excessive credit inquiries can also be a red flag and could make the lender suspect you’ve been shopping for credit because you’ve had trouble getting approved.
Find Out: Can You Buy a House With Bad Credit?
Unusual or inconsistent work history
You’ll need at least a two-year history of steady employment, either in the same position or field, to prove that your income is reliable. Some circumstances that make you look riskier to the lender include:
- Long periods of unemployment
- Self-employment
- Frequent job changes
- A new job in a different line of work
Buying a home far from where you work
If your new home is more than 50 miles or so from your place of employment, your lender might suspect that you’re purchasing a second home or investment property rather than a primary residence.
Lending standards are tougher for non-primary residences, and interest rates are usually higher.
Lack of a rental history
Lenders like to see a history of on-time rent payments for at least the most recent 12 months for first-time buyers. That’s because inexperienced renters might be unprepared to suddenly take on a mortgage payment.
Large bank deposits, withdrawals, or transfers
Lenders like for the money in borrowers’ checking and savings accounts to be “seasoned and sourced,” meaning the money has been there long enough, and its source is apparent enough, to show that it’s your money versus gift money or a loan that you’ll need to repay.
Conversely, large withdrawals might cause the lender to think you’re in a financial bind.
Inconsistency in mailing address
Address discrepancies within a loan file are considered “high-level red flags” for mortgage fraud, Fannie Mae warns.
The lender will need a letter of explanation if it finds any inconsistencies in your identifying documents, such as a different address given in your credit report than on your bank statements and tax returns.
How to write a letter of explanation
It’s best to keep your letter of explanation short and sweet. Include as much detail as needed, but address only the specific information the lender requested. The idea is to make it easy for the underwriter to find what they need.
Your letter of explanation should be businesslike in tone and structure. Here is the information mortgage experts recommend including in the letter:
- The date you’re writing the letter
- The lender’s name, mailing address, and phone number
- Your full legal name and loan application number
- Your explanation, with references to any supporting documents you’re including
- Your mailing address and phone number
Once you’ve gathered your information and your thoughts, here’s how to proceed:
1. Be honest
The lender already knows, or at least suspects, an issue with the application. This isn’t the time to try to convince them otherwise or make excuses. Politely state the issue as a matter of fact, and then proceed with the explanation.
2. Keep it brief
The underwriter wants to see all the information they need to understand the issue, but that’s all they want to see. Keep your explanation brief, specific, and to the point.
3. Provide evidence
If, for example, the lender thinks you’ll have an excessive commute from your new home, consider getting a letter from your boss or HR department explaining the situation — let’s say the role is remote or you’re not required to go to the office every day of the week — and attach it to your letter.
Similarly, if an extended illness kept you from working, submit unemployment benefit statements and/or medical bills with your letter.
4. Proofread your letter
An error-free letter shows you’ve taken the underwriter’s request seriously and it makes you look more credible than someone who submits a letter full of mistakes. Ensure that you maintain a professional tone throughout the letter as well.
Letter of explanation template
The content of your letter will, of course, depend on your specific circumstances. You can use the following sample letter and replace the details with your own information and explanation:
Date
XYZ Bank
123 Broadway
New York, NY 10013
555-555-5555
RE: Jane Smith’s mortgage loan application #123456
Dear Loan Specialist:
I’m writing in response to the underwriter’s request for information regarding [my gap in employment] from [January 15, 2023 to June 15, 2023]. The reason for my absence from work was [the premature birth of my son on January 15, 2023].
In support of my explanation, I’ve enclosed the following documentation:
- [An insurance statement documenting that he was hospitalized from January 15, 2023 through April 1, 2023]
- [Certification of Health Care Provider for Family Member’s Serious Health Condition under the Family and Medical Leave Act form]
- [A letter from his pediatrician restricting him from attending daycare until June 15, 2023]
If you have any additional questions, please do not hesitate to contact me.
Sincerely,
Jane Smith
123 State St.
New York, NY 10018
555-555-0001
What to do if your letter of explanation is rejected
In the event the underwriter rejects your explanation, you have a few options. First, you can submit a new letter with more specific details. Include anything you might’ve overlooked the first time and additional documentation to support your explanation.
If that isn’t enough to qualify you for the loan, you could start from scratch and try to get a mortgage with another lender, but you may encounter the same problem.
Your best bet might be to put off your purchase while you improve your credit and/or resolve the issues that precipitated the explanation request. At the very least, the issues will be farther in the past next time you apply, so it might have less impact on the lender’s decision.
Compare multiple lenders
If your letter of explanation is rejected, you might want to try looking at a different lender. Credible’s streamlined process can help. We make comparing multiple mortgage lenders easy.
