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Key takeaways
- A letter of explanation for a mortgage is a document that addresses red flags that might derail a mortgage approval, such as a period of unemployment or an unpaid credit balance.
- A letter of explanation should tell the lender why an event happened and describe steps you’ve taken to solve or recover from the issue, if applicable.
- Not every borrower needs to write a letter of explanation. If you do, your lender will request one.
When you apply for a mortgage, you’ll need to hand over plenty of documentation: your bank statements, tax returns, pay stubs and details on your debts, to name just a few. If your lender has questions or concerns about any of the information you provide, it could also ask for a letter of explanation.
It’s an important document, one that could mean your mortgage application is approved — or not. Here’s everything you need to know about mortgage letters of explanation.
What is a letter of explanation?
A letter of explanation is a document that provides context about potentially troublesome areas in your financial history that appear on your mortgage application.
While your mortgage is going through the underwriting process, your lender may come across information that raises questions about your ability to repay your mortgage. If these questions are serious enough, your application may be denied. But if the lender wants additional details before making that decision, you can provide these in a letter of explanation.
If a lender asks you to submit a letter of explanation, think of it as a requirement, not an option. Your response could make the difference between being granted or refused a mortgage.
Why do you need a letter of explanation for a mortgage?
If your lender asks you to submit a letter of explanation, your mortgage application may have reflected one of the following:
- A job change or employment gap: If you changed jobs just before submitting your application or have experienced a recent gap between jobs, you might need to explain the situation and assure the lender that you’re capable of making mortgage payments.
- Issues on your credit report: If your credit report shows late or missing payments, or potentially a past bankruptcy or foreclosure, you’ll need to discuss any extenuating circumstances and steps you’ve taken to solve the issue and stabilize your finances.
- A recent credit application or a high credit card balance: Applying for and opening a new credit account or having a high credit card balance might hurt your credit — which, in turn, affects the interest rate you’ll be offered or if you get a loan offer at all. Your letter of explanation can give a valid reason for your situation.
- A large transaction in your bank account: The lender might want more details on a recent large withdrawal or deposit that isn’t a regular occurrence. If the deposit was a present to help meet the down payment, a gift letter could explain it.
- An unsteady source of income: If you’re self-employed or an independent contractor, the lender might want a clearer sense of the stability of your earnings.
- Remote work: If you’ve made an offer on a home far from the address of your employer, your lender will want confirmation that you work remotely.
- Losses on your tax returns: If you’ve reported past losses, especially if you own a business, your lender will want evidence that your finances have recovered and that you can afford loan payments.
- Joint accounts or co-signed loans: If you share accounts with another person who isn’t involved in the home purchase, your lender will want assurances that these are in good standing.
If any of these apply to you, consider proactively submitting a letter of explanation. Put yourself in the shoes of someone reviewing your application: Is there anything that might give them pause?
Let’s say you took eight months of unpaid leave last year to help care for an elderly parent. To the lender reviewing your bank statements, you appear to be unemployed during that time. With a letter of explanation, you can help your lender understand that the decision to temporarily stop working was voluntary and that your current income is stable.
How to write a letter of explanation for a mortgage
There’s no need to panic if a lender requests a letter of explanation: It’s a common part of being granted conditional approval for a loan. Still, it’s important to do the job right. Include all the key details of a traditional business letter, whether you’re mailing it or uploading a digital copy:
- The lender’s name and address
- Your name, as it appears on your application, and any client/reference/file number
- Your current mailing address, email address and phone number
- The date you’re submitting the letter and the expected closing date of your home purchase, if you know it
- A short statement summarizing the issue
- An acknowledgment of the event and an explanation of why it happened. If, for instance, you fell behind on loan payments in the past or were out of work for a significant period of time, tell your lender the extenuating circumstances.
- Details about steps you’ve taken to resolve the challenge or issue, or your plans for doing so
- Any details that may be relevant to the lender’s decision-making, including dates, dollar amounts and account information. If you have evidence, include it as an attachment.
- Relevant information about your spouse or other co-borrower, if you have one
- A courteous closing
In your writing, keep these tips in mind:
- Be honest: It’s crucial to be transparent. All the information you provide, including dates and dollar figures, should be factual.
- Be professional: Your letter should have a formal tone and pristine grammar and spelling.
- Be short and to the point: Keep this letter specific to the lender’s inquiries. Unnecessary detail could result in confusion or spark more questions.
Sample letter of explanation for a mortgage lender
While the exact content of your letter depends on your circumstances, you can use this sample letter of explanation to a mortgage lender as a template:
Sample letter of explanation
Date
Lender name
Lender address
Lender city, state and ZIP code
RE: Your Name and Application Number
I am writing to explain the absence of any payroll deposits in my [bank name] checking account for the months of January and February of this year.
During those two months, complications arising from my son’s birth required me to take an unpaid medical absence from my employer under the Family and Medical Leave Act (FMLA). I have since returned to work, in my previous position and with full pay. I am attaching another letter from my employer, [its name], which verifies my active employment status, the date I resumed work and my salary.
I am available to answer any additional questions and look forward to our expected closing date of May 30.
Regards,
Your Name
Your mailing address
Your city, state and ZIP code
Your phone number and e-mail address
If you’ve applied with a co-signer, you’ll need to include the co-signer’s name on the letter as well.
You can make a letter of explanation more compelling with supporting data and paperwork. In the example above, the borrower includes a letter from their employer that supports the claim that they have returned to work after an authorized leave of absence. Include these documents with your letter to streamline the lender’s review process.
What to do if your letter of explanation is rejected
Be prepared: The lender that requests your letter of explanation might ultimately reject it. If this happens, don’t give up.
- Submit a new letter of explanation. Ask your mortgage officer or broker, if you have one, for feedback on other information or evidence you might be able to include.
- Consider applying with a different lender. If your lender still rejects your letter, your application will likely be denied. Other lenders might also request a letter of explanation, but you may receive a different response.
- Postpone your home search and work on the issues affecting your application. If a second lender also rejects your letter of explanation, consider putting off your home search and taking time to improve your credit, stabilize your income or resolve other issues. That way, your next mortgage application may be approved.
FAQ
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As its name indicates, a late payment letter of explanation is a letter that accounts for the circumstances surrounding any delinquent or tardy repayments of loan installments or credit card bills. This letter might also explain how your financial situation has since improved and touch on any actions you’ve implemented to prevent future late payments.
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It’s a good idea to provide supporting documents with your letter of explanation. For instance, if your letter is about a gap in employment, you could include a termination document from your old employer to establish you were laid off and not fired for cause. If you have since returned to the workforce, including recent pay stubs or other proof of the new job and its pay can be helpful. Similarly, if your letter of explanation is about a past credit issue, you can include a recent copy of your credit report that shows your improved credit score.
Additional reporting by Meaghan Hunt
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