When you apply for a mortgage, the lender will review information such as your credit history, employment, income, assets, investments, and outstanding debts. But your financial statements, credit report, and tax returns don’t always tell the full story about 🦄your financial situation.

A letter of explanation helps clarify any information that might give a lender pause. Learn more about when you might need a letter of explanation for a mortgage application and how to write the letter. 

What Is a Letter of Explanation for a Mortgage?

A letter of explanation, sometimes referred to as an LOX or LOE by mortgage underwriters, is similar to a cover letter for a job application. Just as a cover letter expands on the details in your resume, a mortgage letter of explanation further explains your financial documents. For example, you might need to explain that last year’s income wasn’t typical because you took a sabbatical, or that you missed a payment due to a healthcare emergency. 

Why Do You Need a Letter of Explanation?

“A letter of explanation is not a standard or defaulted requirement for a mortgage application,” said Shmuel Shayowitz, president and chief lending officer at Approved Funding, a licensed mortgage bank and direct lender. However, your 澳洲幸运5官方开奖结果体彩网:mortgage lender may request one if your financial information needs clarification. If you’re applying for a government-backed loan, the agency that insures the loan may also require a letter of explanation in certain🐲 situations. 

Even if it’s not req💫uired, it can’t hurt to include a letter of explanation with your mortgage application. “The default for some processors and underwriters is to assume the worst or to err on the side of caution when something is unclear or complicated,” Shayowitz said. “Be💖ing proactive with explanation letters can go a long way in helping a loan processor and mortgage underwriter understand something that might be confusing.”

In particular, the foll🍎owing situations merit the inclusio🌼n of a letter of explanation. 

Erratic Income or Gaps in Employment

Most lenders look for a consistent and reliable income✤ that ensures you can keep up 💎with your mortgage payments. If you were unemployed or did not receive income for more than a month over the last two years, you should include a letter of explanation that details the reason you weren’t working, such as:

• Childbirth or caring for another family member
• Pursuing further education
• Being laid off
• Being self-employed or working in a seasonal industry
• Going out of business or downsizing

Issues on Your Credit Report

If your credit report shows red flags, like missed payments or defaults, 澳洲幸运5官方开奖结果体彩网:bankruptcies, or 澳洲幸运5官方开奖结果体彩网:foreclosures, it’s essential to include a letter of explanation noting what happened and why it’s not l💖ikely to reoccur. You’ll also want to include the date of the event, the name of your creditor, and the account numb🅠er associated with the delinquent debt.

No Rental or Mortgage Payment History

If you have been living with a friend or family member rather than making monthly housing payments for your own place, the homeowner you live with will need to write a letter of explanation💜. The homeowner should explain that they haven’t charged you rent and include the dates you lived on their property before signing the letter🐽. 

Profits or Losses From Farming

If you filed 澳洲幸运5官方开奖结果体彩网:Schedule F with your tax return because you earned or lost income fr🦂om a farm property, you’re required to include a letter of explanation. Include the address of the farm and clearly state that it is not located on the property you’re buying with the mortgage. 

Large Deposits or Withdrawals

If you received a large deposit to your bank account, the lender might think you accepted a gift or a loan from a family member and wonder if your income is sufficient without additional help. A large withdrawal may also indicate to the lender that you’re having financial troubles. There are other reasons ✨for large bank transactions, however. For example, you may have received a bonus from your employer, liquidated investments at an opportune time, or withdrawn funds for a home renovation. Include a letter of explanation thaꦜt shows why the atypical transaction occurred. 

Possible Occupancy Questions

Lenders underwrite 澳൩洲幸运5官方开奖结果体彩网:vacation homes and investment properties differently from primary residences. It’s illegal to misrepresent your occupancy intentions. If you’re applying for a primary residence mortgage for a property located far from your employer, or if you’re applying for a second home mortgage for a property in close proximity to your primary residence, the lender may think you intend to use it as a rental propeꦐrty. 

Address Discrepancies

If any of your documents show a different address, you should include a letter of explanation with a reason for the discrepancy to assure the lender you’re not a victim of identity theft. 

How to Write a Letter of Explanation

“Your explanation letter should be specific, precise, and well-communicated,” said Shayowitz. Avoid general statements about y🍒our ability to manag💎e your finances and speak to a specific issue. 

For example, if you missed a payment, explain why it happened, point to your otherwise positive payment history, and state when you brought your account back up to date. A statement like “I make every effort to stay on top of my payments” is too vague because it won’t provide the lender with the details they need to make🀅 an approval decision. 

You may need to attach supporting documentation as well. For example, if you’re buying a home far away from work, you might want to include a letter from your employer that shows your remote work arrangement. If you took out a large withdrawal to pay for landscaping in order to prep your home for sale, include a receipt from the landscaping company. If you missed a payment du𒊎e to being hospitalized, include medical records. 

You’✤ll also want t✃o include the following elements:

• Your name, address, and phone number
• The lender’s name, address, and phone number
• The mortgage application number
• Your explanation, which should refer to the attached documents that support it
• Your signature and the date

Example of a Letter of Explanation

澳洲幸运5官方开奖结果体彩网: Today’s Date

澳洲幸运5官方开奖结果体彩网: Example Lender
Lender Address

澳洲幸运5官方开奖结果体彩网: Loan Application Number

澳洲幸运5官方开奖结果体彩网: RE: Anna Smith’s Mortgage Application

澳洲幸运5官方开奖结果体彩网: To Whom It May Concern,

I am writing to explain my gap in employment that occurred between 02/15/2023 and 04/10/2023. 

My mother was admitted to the hospital for surgery on 02/09/2023 after a fall. I applied for Family and Medical Leave on 02/10/2023 in order to care for my mother during her recovery. My employer approved FMLA-protected leave on 02/14/2023. I have attached the approval letter from my employer, which grants up to 12 weeks of leave. 

During my period of unpaid leave, I relied on sufficient reserves in my savings account as well as my husband’s income to cover my expenses. I didn’t miss any payments on my credit cards or auto loan. I returned to work on 04/11/2023. In the following months, I made several deposits into my Capital One savings account to replenish my reserves. 

澳洲幸运5官方开奖结果体彩网: Sincerely,

澳洲幸运5官方开奖结果体彩网: Anna Smith

Anna Smith’s Address
Anna Smith’s Phone Number

The Bottom Line

A letter of explanation can help your mortgage application process, especially if you have had financial issues you want to clarify. A good letter will address the specific issues and explain why they are not likely t💟o reoccur. Consider consulting a real estate professional for more guidance in writing a letter of explaꦫnation that fits your needs.