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Updated: November 4, 2024
A Letter of Explanation is a document that clarifies details within a home buyer’s mortgage application that may raise questions with their mortgage lender.
A Letter of Explanation is a way for home buyers to clarify aspects of their mortgage application that may not be clear to a lender. The common mortgage acronym for Letter of Explanation is LOE.
Lenders request that buyers write a letter of explanation whenever there is unusual or unclear information in the context of the mortgage application, including:
Letters of explanation describe irregularities in a mortgage application and give mortgage lenders context, which makes it easier to get the mortgage approved.
A well-written LOE can be the difference between a lender accepting or rejecting a mortgage application, especially when the home buyer’s credit profile does not neatly fit into standard mortgage underwriting criteria.
Imagine a first-time home buyer who recently applied for a mortgage. In their mortgage application, there is a six-month period when the home buyer was unemployed.
Upon reviewing the application, the lender is concerned about this six-month employment gap, which may indicate financial instability.
The buyer writes a three-sentence Letter of Explanation, clarifying that during the period in question, they took time off work to care for an ailing family member and had sufficient savings to manage finances. They also provided evidence of re-employment and steady income after that.
The letter of explanation helps the lender understand the buyer’s situation, removing concerns about financial stability.
A Letter of Explanation should clearly, concisely, and honestly address the specific issue or question raised by the lender. It should include relevant dates, specific details, and any supporting documentation when appropriate.
The length of a Letter of Explanation can vary, but it should be as brief as possible while fully addressing the lender’s concerns. Usually, a few sentences are sufficient.
A letter of explanation could be required for any mortgage type, including conventional loans, FHA loans, USDA loans, VA loans, and others.
No, a Letter of Explanation is not legally binding. It is a personal, explanatory document that gives context to a home buyer’s financial situation. However, it is crucial to be honest and accurate in the information provided, as any false statement can have serious consequences, including affecting the mortgage application’s outcome or leading to legal repercussions.
No, a Letter of Explanation does not guarantee mortgage approval. However, it provides clarity to the lender, which can positively influence their decision.
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