Understanding the Need for Explanation Letters
Mortgage lenders often require explanation letters to clarify any discrepancies or unusual items that appear on your credit report, bank statements, or other financial documents. These letters help lenders assess your risk and make informed decisions about approving your loan application. Providing clear, concise, and honest explanations can significantly improve your chances of mortgage approval. Without these letters, delays or outright rejections are possible.
A well-written explanation letter demonstrates your transparency and willingness to address any concerns the lender may have. Be sure to proofread carefully and provide any supporting documentation requested. Each letter should be tailored to the specific situation it addresses. The following samples provide templates and examples for various scenarios you might encounter. Remember to adapt them to your individual circumstances.
20 Sample Explanation Letters for Mortgage Lenders
Sample 1: Large Deposit Explanation
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender Name]
[Lender Address]
Subject: Explanation for Large Deposit on [Date of Deposit]
Dear [Loan Officer Name],
This letter is to explain the large deposit of $[Amount] that appeared in my bank account on [Date of Deposit]. This deposit was a gift from my [Relationship – e.g., parents] to help with the down payment on my new home. I have attached a copy of the gift letter and the bank statement showing the deposit.
Thank you for your time and consideration.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 2: Credit Inquiry Explanation
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender Name]
[Lender Address]
Subject: Explanation for Credit Inquiry from [Company Name]
Dear [Loan Officer Name],
This letter is to explain the credit inquiry from [Company Name] on [Date of Inquiry]. I was shopping around for auto insurance rates at that time and requested quotes from several different companies. I did not open an account with [Company Name].
Thank you for your time and consideration.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 3: Late Payment Explanation
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender Name]
[Lender Address]
Subject: Explanation for Late Payment to [Creditor Name]
Dear [Loan Officer Name],
This letter is to explain the late payment to [Creditor Name] that occurred on [Date of Late Payment]. I was traveling out of the country at that time and did not have access to my online banking to make the payment. I have since set up automatic payments to avoid any future late payments. I regret this oversight.
Thank you for your time and consideration.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 4: Address Discrepancy Explanation
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender Name]
[Lender Address]
Subject: Explanation for Address Discrepancy
Dear [Loan Officer Name],
This letter is to explain the address discrepancy noted on my credit report. I previously lived at [Previous Address] from [Start Date] to [End Date]. I have updated my address with all relevant creditors. My current address is [Your Address].
Thank you for your time and consideration.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 5: Job Gap Explanation
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender Name]
[Lender Address]
Subject: Explanation for Employment Gap
Dear [Loan Officer Name],
This letter is to explain the gap in my employment history from [Start Date] to [End Date]. During this time, I was [Reason for Gap – e.g., caring for a sick family member, pursuing further education]. I am now employed at [Current Employer] since [Start Date].
Thank you for your time and consideration.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 6: Overdraft Fee Explanation
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender Name]
[Lender Address]
Subject: Explanation for Overdraft Fees
Dear [Loan Officer Name],
This letter is to explain the overdraft fees that appear on my bank statement. These occurred due to [Reason for Overdraft – e.g., an unexpected automatic payment]. I have since taken steps to prevent this from happening again by [Steps Taken – e.g., setting up balance alerts, increasing overdraft protection].
Thank you for your time and consideration.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 7: Inquiry on collections
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender Name]
[Lender Address]
Subject: Explanation for Collection Account
Dear [Loan Officer Name],
This letter addresses the collection account listed on my credit report from [Collection Agency Name]. This debt originated from [Original Creditor] due to [Brief Explanation, e.g., a disputed medical bill]. [State if the debt is paid or a payment plan is in place, and provide details/proof]. I have [Taken Action, e.g., disputed the debt with the credit bureau and the collection agency].
Thank you for your time and consideration.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 8: Derogatory marks
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender Name]
[Lender Address]
Subject: Explanation for [Type of Derogatory Mark, e.g., Charge-Off]
Dear [Loan Officer Name],
This letter explains the [Type of Derogatory Mark, e.g., charge-off] from [Creditor Name] that appears on my credit report. This occurred in [Year] due to [Brief Explanation, e.g., unforeseen financial hardship following a job loss]. I have since [Action Taken, e.g., established a stable income, started rebuilding my credit]. I can provide documentation [Documentation, e.g., pay stubs] to support this.
Thank you for your time and consideration.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 9: Down payment source
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender Name]
[Lender Address]
Subject: Source of Down Payment Funds
Dear [Loan Officer Name],
This letter clarifies the source of the funds for my down payment. $[Amount] is from [Source of Funds, e.g., my savings account at [Bank Name], proceeds from the sale of personal property]. I have attached [Documentation, e.g., bank statements, bill of sale] to verify these funds.
Thank you for your time and consideration.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 10: Assets verification
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender Name]
[Lender Address]
Subject: Verification of [Asset Type, e.g., Retirement Account]
Dear [Loan Officer Name],
This letter is to verify my ownership of the [Asset Type, e.g., 401(k) account] held at [Institution Name]. The current balance is approximately $[Amount], as detailed in the attached statement. These funds [Intended Use, e.g., will not be used for the down payment].
Thank you for your time and consideration.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 11: Disputed accounts
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender Name]
[Lender Address]
Subject: Explanation of Disputed Account
Dear [Loan Officer Name],
This letter is to explain the disputed account with [Creditor Name] listed on my credit report. The dispute is regarding [Reason for Dispute, e.g., fraudulent charges]. I have filed a police report and am working with [Creditor Name] to resolve the issue. I have attached copies of [Relevant Documentation, e.g., the police report, correspondence with the creditor].
Thank you for your time and consideration.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 12: Child Support
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender Name]
[Lender Address]
Subject: Child Support Payments
Dear [Loan Officer Name],
This letter clarifies my current child support obligations. I pay $[Amount] per month for [Number] child/children. I have attached [Documentation, e.g., a copy of the court order, payment history] to verify these payments. These payments [Impact on DTI, e.g., are factored into my debt-to-income ratio].
Thank you for your time and consideration.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 13: Rental History
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender Name]
[Lender Address]
Subject: Verification of Rental History
Dear [Loan Officer Name],
This letter provides details regarding my rental history at [Previous Address] from [Start Date] to [End Date]. My landlord was [Landlord’s Name and Contact Information]. I consistently paid my rent on time. [Optional: Briefly explain any late payments, if applicable].
Thank you for your time and consideration.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 14: Tax Returns
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender Name]
[Lender Address]
Subject: Explanation of Tax Return Information
Dear [Loan Officer Name],
This letter clarifies certain information on my [Year] tax return. [Specific Item Requiring Explanation, e.g., The deduction for business expenses]. This was due to [Reason for the Item, e.g., my freelance work as a consultant]. I have attached [Supporting Documentation, e.g., Schedule C, receipts] for your review.
Thank you for your time and consideration.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 15: Unusual Activity on Bank Statements
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender Name]
[Lender Address]
Subject: Explanation of Unusual Bank Activity
Dear [Loan Officer Name],
This letter is to clarify the unusual activity on my bank statement for [Date or Month]. The [Specific Activity, e.g., large withdrawal] was for [Purpose of Withdrawal, e.g., a home improvement project]. I have attached [Supporting Documentation, e.g., receipts, contractor invoices] to verify this.
Thank you for your time and consideration.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 16: Cosigned Loan
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender Name]
[Lender Address]
Subject: Cosigned Loan for [Borrower’s Name]
Dear [Loan Officer Name],
This letter is to explain that I cosigned a loan for [Borrower’s Name] on [Date]. The loan is for [Purpose of Loan] and the current balance is [Loan Balance]. [Borrower’s Name] is responsible for making all payments. [Optional: Briefly explain borrower’s payment history, if known].
Thank you for your time and consideration.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 17: Divorce Decree
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender Name]
[Lender Address]
Subject: Explanation Regarding Divorce Decree
Dear [Loan Officer Name],
This letter provides context for the divorce decree I have submitted. The decree finalized on [Date]. [Summarize relevant aspects of the decree affecting finances, e.g., spousal support obligations, property division]. I have attached a copy of the full divorce decree for your review.
Thank you for your time and consideration.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 18: Short Sale or Foreclosure
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender Name]
[Lender Address]
Subject: Explanation Regarding Previous [Short Sale/Foreclosure]
Dear [Loan Officer Name],
This letter is to explain the [Short Sale/Foreclosure] on my previous property located at [Property Address] in [Year]. This was due to [Explain the Circumstances, e.g., significant job loss and unexpected medical expenses]. Since then, I have [Steps Taken to Recover Financially, e.g., re-established stable employment, rebuilt my credit].
Thank you for your time and consideration.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 19: Income Variance
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender Name]
[Lender Address]
Subject: Explanation Regarding Income Variance
Dear [Loan Officer Name],
This letter addresses the variance in my income over the past two years. In [Year], my income was [Amount] due to [Reason for Lower Income, e.g., a temporary reduction in hours, a period of self-employment]. In [Current Year], my income has returned to [Amount] and is projected to remain stable. I have attached [Documentation, e.g., pay stubs, tax returns] to support this.
Thank you for your time and consideration.
Sincerely,
[Your Signature]
[Your Typed Name]
Sample 20: Gift Letter Funds
[Your Name]
[Your Address]
[Your Phone Number]
[Your Email Address]
[Date]
[Lender Name]
[Lender Address]
Subject: Confirmation of Gift Letter Funds
Dear [Loan Officer Name],
This letter confirms that the funds provided in the gift letter from [Donor’s Name] are a true gift and do not need to be repaid. The gifted amount of $[Amount] will be used for the down payment and closing costs on the property located at [Property Address]. [Donor’s Name] is my [Relationship to Donor, e.g., mother].
Thank you for your time and consideration.
Sincerely,
[Your Signature]
[Your Typed Name]
Key Takeaways and Best Practices
Writing effective explanation letters is crucial for a smooth mortgage approval process. Always be honest, concise, and provide supporting documentation whenever possible. Tailor each letter to the specific issue and address it directly. Proofread carefully before submitting. Don’t hesitate to contact your loan officer if you have questions about what information to include. Providing these letters proactively can prevent delays and demonstrate your commitment to transparency.
