Key takeaways

  • A letter of explanation for a mortgage is a document that provides further details about a borrower's credit or financial circumstances.
  • The letter of explanation might describe why you were unemployed for a period of time, for example, or why there's an unpaid balance on your credit report.
  • 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, details on your debts, to name just a few. Depending on your financial situation, your lender could also ask for a letter of explanation.

What is a letter of explanation?

A mortgage lender might ask you to write a letter of explanation to better understand your finances when deciding whether to approve you for a loan. While your lender’s underwriting department reviews factors such as your credit score and income, those figures might not paint a complete picture of you as a borrower — especially if you haven’t much of a credit history. A letter of explanation helps fill in that picture, offering lenders a deeper understanding of your ability to repay a mortgage.If a lender asks you to submit a letter of explanation, think of it as a requirement – not an option. The lender needs further clarification on one or more matters.

Why do you need a letter of explanation for a mortgage?

If your lender asks you to submit a letter of explanation, the request is likely linked to a specific piece of information in your application that raised a red flag. A letter of explanation is simply a way to help resolve that red flag, which might include:

  • A job change: If you change jobs, particularly in the time frame leading up to closing, you might need to explain why you made the switch.
  • Issues on your credit report: Perhaps you were delinquent on past debt payments. Your letter of explanation can help explain these and other credit report issues.
  • A new credit card opening or a high credit card balance: Applying for and opening a new credit card or having a high credit card balance might hurt your credit. Your letter of explanation can explain the circumstances that led to these outcomes.
  • A large transaction (withdrawal or deposit) in your bank account: The lender might want more details on why a large sum of money was put into or taken out of your account.
  • An unsteady source of income: If you’re self-employed or an independent contractor, the lender might want a better idea of your earnings.

It might be wise to proactively submit a letter of explanation, especially if you’re aware of a potential red flag. 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 off work last year to help care for an elderly parent — an unpaid leave. 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. This might alleviate the lender’s concerns about another period of unemployment in the near future.

How to write a letter of explanation

There’s no need to panic if a lender requests a letter of explanation. Include all the key details of a traditional business letter — whether you’re mailing or emailing it:

  • The lender’s name and address
  • Your name (as it appears on your application) and any client/reference/file number
  • The date you’re submitting the letter and the expected closing date (if you know it)
  • A summary statement or short intro that quickly helps an underwriter identify the topic under discussion
  • Your current mailing address, email address and phone number

Keep the following tips in mind:

  1. Write honestly: If your lender asks you for an explanation, it’s crucial to be transparent.
  2. Write briefly: Share the facts, but stick to the facts. There’s no need to write a novel. Keep the letter concise, focusing only on the details that need to be covered.
  3. Write professionally: Approach your letter with a heightened degree of formality. Make your past English teachers proud with pristine spelling, capitalization and business-like, careful composition.

Sample letter of explanation

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:

Document
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 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

If you’ve applied with a co-signer, you’ll need to include the co-signer’s name on the letter, as well.

It’s important to note that you can make a letter of explanation more compelling with supporting data and paperwork. In the example above, the borrower included a letter from their employer that supports the claim that they have returned to work after an authorized leave of absence.

Whatever your reason for writing a letter of explanation, consider if there is other documentation that can back up your claim, and if you have them, submit them.

What to do if your letter of explanation is rejected

Be prepared: The lender that requests your letter of explanation might ultimately reject it. In this scenario, don’t give up. Try writing a fresh letter of explanation that provides more details that help answer the lender’s inquiries and bolstered by documentation. Think carefully about anything you might have accidentally left out of your previous letter of explanation.

If your second try fails, give thought to starting the mortgage application process all over again with a different lender. Just be aware that other lenders might also request a letter of explanation.

If you’re still encountering difficulties in getting loan approval, you might consider postponing your home search and working harder on improving your credit. By following best practices — including paying your bills on time, not opening new credit accounts and avoiding high credit card balances — you can raise your credit score and your chances of getting approved for a loan in the future.