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Letter of explanation: What it is and why you might need one

What we'll cover

  • What a letter of explanation is

  • The reasons you might provide one

  • How to craft a well-written letter

When you're looking into buying a home or refinancing your existing home, you might need to provide a letter of explanation.

You may be wondering, what's a letter of explanation? Is it another hoop you have to jump through in order to purchase a home? The short answer is, yes it could be. But, a letter of explanation offers you an opportunity to explain various financial situations to your prospective lender and can help you get a mortgage loan, so it can be a positive step. In this piece, we’ll explain a letter of explanation and offer some information about why you might need to write one.

What’s a letter of explanation?

A letter of explanation gives you a chance to answer the questions your lender might have about your loan application. Your lender may request that you explain certain details about your application, such as the following:

  • Gaps in your employment

  • Unusual deposit activity

  • Inquiries or accounts listed on your credit report

  • Late payments

  • Delinquencies

  • Charge-offs

  • Bankruptcies

  • Foreclosures and judgments

A letter of explanation may be required for both conventional loans and jumbo loans .

Underwriters, who view mortgage applications to determine whether you are eligible to receive an initial loan or refinance, will view your letter of explanation.

You may consider it a pain to have to write a letter of explanation but think of it this way: It's a good thing because you can share additional details about your loan application to help move it along. You can also personalize it to address the full scope of the matter.

Reasons to provide a letter of explanation

Why might you need to provide a letter of explanation? Let's deep dive into some of the reasons.

Credit report challenges

Put simply, you must demonstrate that you’ve been able to keep up with all the payments that you’ve been responsible for over the years.

Lenders need to make sure you'll make your mortgage payments promptly. When a creditor reports that you have missed payments or if they zero in on you defaulting on your loan, your credit report can reflect that, resulting in a red flag for mortgage lenders.

Your letter should include an explanation of the credit issue and the date it happened. In addition, you should also explain how your circumstances have changed and why it won't recur moving forward.

Large gaps in your employment history

When you can't prove that you have had a job for a particular length of time, you may need to explain gaps in unemployment. You may be able to point to an inability to find a job, maternity leave, advanced education, loss of a business, or another reason. It's a good idea to explain how you supported yourself in lieu of regular employment during this time, as well.

No rental history

If you don't have evidence of rental history, you may need to be prepared to explain how you lived with a family member or demonstrate how you plan to make future mortgage payments.

Large bank transactions

Lenders like to see that bank deposits make sense in the context of your job and the money that you bring in. They are looking for a stable source of income versus gift money or a loan. In addition, if you make large withdrawals, a lender may believe that you're struggling financially.

How to write a letter of explanation

Let's break down a sample letter of explanation, with the primary components highlighted in bold. You can use this as an example format to write your own letter.

You want to keep your letter professional and to the point. Though, when warranted, you do want to go into detail about your situation. Steer clear of emotional language or detours in language unrelated to the matter at hand.

Have a friend read the letter over for clarity, spelling, and grammar. Try to send the letter as soon as possible so your mortgage application stays on track in a timely manner.

October 5, 2021 (Current date)

Example Lending Company (Lender name)

123 Main Street (Complete mailing address)

Detroit, MI 48201

000-000-0000 (Loan number)

RE: Mary Jones’s Mortgage Loan Application (Subject name, which identifies your application)

To Whom it May Concern:

I’m writing to you to explain my employment gap from 01/01/2021 to 06/01/2021. (Introduction that introduces what the lender has asked for.)

On January 1, 2021, my husband, John Jones, and I were in a car accident. I could not continue my job due to my extensive injuries. I got a job on June 2, 2021, as an associate at the local elementary school, Lincoln Elementary. I have continued to work at the school and will for the foreseeable future.

I've enclosed a copy of my medical bills as proof of my good standing and on-time payments with this account.


Mary Elaine Jones (Your full legal name, signed)

100 Lincoln Street (Your address)

Detroit, MI 48201

123-456-7890 (Your phone number)

Provide a well-written letter of explanation

If a lender asks you to submit a letter of explanation, their goal is to find out whether you meet the requirements to get a mortgage. When they see a red flag, they need your explanation so they don't expose themselves to undue risk.

You can also be proactive and submit a letter of explanation if you know that something in your history could potentially raise a red flag. You can even offer to chat with your lender ahead of time to find out whether you need to provide additional information.

All in all, a well-written letter of explanation can help you secure a mortgage and bring you one step closer to becoming a homeowner.

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