How To Write A Letter Of Explanation For A Mortgage: Your Complete Guide
Securing a mortgage is a significant step, and sometimes, lenders need more information. This is where a Letter of Explanation (LOE) comes in. It’s your chance to clarify any potential red flags in your application and provide context for specific financial details. This article will walk you through everything you need to know to write a compelling and effective LOE, increasing your chances of mortgage approval.
Understanding the Purpose of a Letter of Explanation
Before diving into the “how,” let’s clarify the “why.” A letter of explanation is a formal document you provide to a mortgage lender to clarify specific items or situations that appear on your loan application or supporting documentation. These items often require further explanation to demonstrate your ability to repay the mortgage and to align with the lender’s guidelines. Think of it as providing context, not excuses. It’s your chance to proactively address potential concerns and reassure the lender of your financial responsibility.
What Triggers the Need for an LOE?
Lenders use a checklist of requirements to assess your creditworthiness. Several triggers necessitate a letter of explanation. These include, but aren’t limited to:
- Credit Score Inquiries: Recent credit inquiries, particularly those from multiple lenders, can raise concerns.
- Large Deposits: Significant, unexplained deposits in your bank statements.
- Employment Gaps: Periods of unemployment or changes in employment history.
- Debt-to-Income Ratio (DTI) Concerns: High DTI ratios that might indicate difficulty in managing debt.
- Discrepancies in Documentation: Any inconsistencies between the information you provide and the documentation you submit.
- Changes in Address: Recent moves or multiple addresses over a short period.
- Late Payments: Past late payments on credit accounts or other debts.
- Gift Funds: Receiving a gift for the down payment.
Preparing to Write Your Letter: Gathering Information and Identifying Key Points
The key to a successful LOE is thorough preparation. Before you start writing, gather all the necessary documentation and identify the specific points you need to address.
Gathering Supporting Documentation
This is the most important step. Your letter should be supported by verifiable evidence. Examples include:
- For Large Deposits: Bank statements showing the source of the funds (e.g., a sale of an asset, a gift letter).
- For Employment Gaps: Offer letters for new jobs, pay stubs, or a brief explanation of the situation.
- For Late Payments: Statements showing the payment history and the reason for the delinquency (e.g., a billing dispute).
- For Credit Inquiries: Documentation related to the loan applications or services you were seeking.
- For Gift Funds: A signed gift letter from the donor, along with proof of the donor’s ability to provide the gift.
Identifying the Specific Points to Address
Carefully review your mortgage application and supporting documents. Identify each item that requires clarification. Be specific and avoid generalizations. The more detail you provide, the better. List each issue you need to address and gather the relevant information for each.
Crafting Your Letter: Structure and Content
Now that you’ve gathered your information, it’s time to craft your letter. A well-structured letter is easy to read and helps the lender quickly understand your situation.
Formatting Your Letter
- Date: Include the current date.
- Lender’s Name and Address: Address the letter to the specific lender or loan officer.
- Subject Line: Use a clear subject line, such as “Letter of Explanation for [Your Name] - Loan Application [Loan Number, if applicable].”
- Salutation: Use a professional salutation, such as “Dear [Loan Officer’s Name],” or “To Whom It May Concern.”
- Closing: Use a formal closing, such as “Sincerely,” or “Respectfully.”
- Your Name and Contact Information: Include your full name, address, and phone number.
The Body of Your Letter: Addressing Each Issue
The body of your letter is where you explain each item that needs clarification.
- Start with a Brief Introduction: Briefly state the purpose of the letter.
- Address Each Issue Separately: For each issue, clearly state the following:
- The Issue: What is the specific item you’re addressing? (e.g., “The $5,000 deposit on my May 15th bank statement…”)
- The Explanation: Provide a clear and concise explanation of the issue. Be honest and straightforward.
- Supporting Documentation: Mention the supporting documentation you’re providing (e.g., “Attached is a copy of the check from the sale of my car…”).
- Maintain a Professional Tone: Avoid slang, jargon, or emotional language. Focus on the facts.
- Be Concise: While providing enough detail, keep your explanations brief and to the point.
- Proofread Carefully: Ensure your letter is free of grammatical errors and typos.
Common Scenarios and How to Address Them
Let’s look at some common scenarios and how you might address them in your LOE:
Explaining Large Deposits
“The $10,000 deposit on my May 15th bank statement represents the proceeds from the sale of my car, a 2018 Honda Civic. I sold the vehicle to John Doe on May 10th for $10,000. I have attached a copy of the bill of sale and a copy of the check I received from Mr. Doe as supporting documentation.”
Addressing Employment Gaps
“From January 1st, 2023, to March 15th, 2023, I was unemployed. During this time, I was actively seeking employment and focused on professional development. I was offered a position as a Marketing Manager at Acme Corporation on March 1st, 2023, and began working on March 15th, 2023. I have attached a copy of my offer letter from Acme Corporation.”
Explaining Late Payments
“On June 15th, 2023, I inadvertently made a late payment on my credit card account with ABC Bank. This was due to a change in my billing address. I have since updated my address with ABC Bank, and I have not missed any payments since. I have included a copy of my credit card statement showing the payment history.”
Addressing Credit Inquiries
“I authorized a credit inquiry on May 1st, 2023, with XYZ Insurance for a car insurance policy. I was comparing rates for car insurance and decided to go with another insurance provider. Attached is a copy of the quote from XYZ Insurance.”
Tips for Writing a Strong LOE
Here are some additional tips to help you write a compelling letter of explanation:
- Be Honest and Transparent: Lenders appreciate honesty. Don’t try to hide anything or make excuses.
- Be Proactive: Anticipate any potential questions the lender might have and address them in your letter.
- Be Specific: Provide specific dates, amounts, and details.
- Keep it Concise: Get to the point and avoid unnecessary information.
- Proofread Carefully: Errors can undermine your credibility.
- Organize Your Thoughts: Before you start writing, organize your thoughts and gather all the necessary documentation.
- Consider Professional Advice: If you’re unsure how to address a particular issue, consider seeking advice from a mortgage professional or financial advisor.
Submitting Your Letter: What to Do Next
Once you’ve written your letter, review it carefully to ensure accuracy and completeness.
Attaching Supporting Documents
Make sure you have included all necessary supporting documentation and properly attached it to your letter. Label each document clearly so the lender can easily identify it.
Submitting Your Letter to the Lender
Submit your letter and supporting documents to your lender in the format they prefer (e.g., email, mail, or through an online portal). Keep a copy of your letter and all supporting documents for your records.
Frequently Asked Questions About Letters of Explanation
Here are five common questions people have about writing a letter of explanation for a mortgage:
What if I don’t remember the exact details of a transaction?
- If you don’t remember the exact details, be as specific as you can. Provide a range of dates or amounts, and explain why you’re unsure. The goal is to be transparent and demonstrate a good-faith effort to provide accurate information.
Can I use a template for my letter?
- While using a template as a starting point is acceptable, customize it to your specific situation. Generic templates often lack the necessary detail to address your unique circumstances. Ensure the template covers all the relevant points for your LOE.
Is it better to be overly detailed or keep it brief?
- Strive for a balance. You should provide enough detail to explain the situation clearly, but avoid unnecessary information. Focus on the facts and keep your explanations concise.
What if the lender asks for more information after I submit my letter?
- Respond promptly to any requests for further information. The lender may need additional clarification or documentation. Provide the requested information as quickly as possible to keep the loan process moving forward.
How long should my letter of explanation be?
- There is no set length. The length should be determined by the complexity of the issues you are addressing. Keep it as brief as possible while ensuring you have provided enough information to explain the situation thoroughly.
Conclusion: Your Letter, Your Mortgage
Writing a letter of explanation for a mortgage is a crucial step in the loan approval process. By understanding the purpose of the letter, gathering the necessary information, and crafting a clear and concise explanation, you can significantly increase your chances of mortgage approval. Remember to be honest, transparent, and provide as much detail as possible. This guide provides the framework for writing a compelling LOE, helping you confidently navigate this important part of the mortgage process and achieve your homeownership goals.