letter of explanation

What is a Letter of Explanation?

Buying a home is a really exciting and comprehensive process. You’re asked to collect various pieces of documentation, as well as provide credit and bank information. A letter of explanation, or LOE, is also a common request from your lender. Let’s dive into what your lender means by a letter of explanation.

What is a Letter of Explanation?

Why is a letter of explanation needed?

It’s an underwriter’s job to read between the lines, even if all of your information seems like it will pass the test. If you’ve recently changed jobs, you have suspicious activity in your bank account, declining income, credit inquiries on your credit report, former delinquencies, or occupancy concerns, a letter of explanation may be required. One of the most common reasons a lender will ask you for a letter of explanation has to do with money, and where it came from. For example, if you provided a bank statement to satisfy your loan conditions, and there is a deposit for $10,000 in the account, the underwriter will most likely ask you for a letter. To the underwriter it looks like that transaction doesn’t quite line up with your salary. In the end, the mortgage team wants to set you up for success and make sure you’re ready for a loan.

How to write a letter of explanation

It’s best to keep letters of explanation short and simple. Start off with a basic heading and salutation, move onto a short explanation to resolve the confusions, and sign and date it. Too much information could cause you and the underwriter more work. If necessary, provide additional documentation to support the letter. All in all, whatever you’re explaining has to make sense and put the underwriter’s mind at ease. Send it to a family member to read if you’re concerned with the length or verbiage.

Be proactive

One of the most common reasons close dates are pushed out, is a delay on the buyer’s end. If you provide a bank statement that looks unusual, create a letter of explanation before your lender has to ask you for one. This helps the mortgage team move faster on your account, as well as presents you in a prepared and organized light. If you received gift money to help you close on your loan, have a copy of your bank statement as well as the person who gifted you the money’s bank statement. If you have to move large sums of money around, it’s best to do 60+ days prior to the loan application.

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