When applying for loans, especially mortgages, lenders review your financial details carefully. Sometimes, they encounter questions about your credit history, income, or bank statements. A Letter of Explanation (LOE) is a formal letter you provide to clarify these points, giving lenders clear context so they can accurately assess your risk and make informed approval decisions.
Why Lenders Request an LOE
Underwriters, who verify loan applications, use LOEs to investigate any inconsistencies or red flags. For example, unexplained large deposits, employment gaps, or past credit issues may require explanation. Rather than rejecting your application outright, the lender asks for an LOE to understand your situation better.
Common Reasons for an LOE Request
- Credit History Concerns: Late payments, collections, past bankruptcy or foreclosure. Explain causes and steps you’ve taken to prevent recurrence.
- Income & Employment Gaps: Gaps in work history or recent job changes, especially if self-employed.
- Large Bank Deposits: Unexplained large amounts require source clarification. Often these are gifts, which also need a separate gift letter.
- Multiple Credit Inquiries: Explain if you’re rate-shopping for a mortgage or opened new accounts recently.
- Inconsistent Personal Information: Confirm your primary residence if addresses vary across documents.
How to Write an Effective LOE
- Be direct and concise; state the issue clearly.
- Be honest and factual to build trust.
- Take responsibility and describe corrective actions.
- Include supporting documents like medical bills or gift letters.
- Use a formal letter structure with date, your contact info, lender’s name, loan number, subject line, body, and signature.
Mistakes to Avoid
Avoid vague explanations, providing too much irrelevant information, emotional tone, or forgetting to sign the letter. Keep your letter professional and focused.
An LOE does not guarantee loan approval but helps resolve lender concerns to improve your chances. For more details on loan processes, see our Mortgage Underwriting and Loan Application guides.
References
- Letter of Explanation (LOX) for a Mortgage: What It Is, How to Write One, Investopedia
- Mortgage Underwriting Basics, ConsumerFinance.gov
- Letter of Explanation (LOE) For A Mortgage, Forbes Advisor
Learn more about gift letters in mortgage applications.
This refined explanation ensures clarity, accuracy, and usefulness for FinHelp.io readers seeking to understand LOEs.
