Tell your side of the financial story with a Letter of Explanation

A Letter of Explanation (LOE) is written to a mortgage lender to explain any past derogatory credit, housing or employment issues that can show up on a person’s financial record. If you’re asked for a LOE, it’s an opportunity for you to clarify any past challenges you may have had, clear up any glitches or misunderstandings to your credit, and demonstrate how you remedied negative situations. Without a LOE, the lender or underwriter will only know bare facts – not the why that tells your side of the story. Submitting a strong LOE is an opportunity to share more about you and your financial position. 

When a LOE is needed: 

• Bankruptcy filed (either discharged or dismissed) 

• Any late payments within three years 

• Paid or unpaid collections 

• Judgements/liens within the last seven years (paid or unpaid) 

• Substantial increase from your current housing expense to the proposed housing expense  

• Gap in employment greater than 30 days 

• Change in employment or income (i.e. substantial decrease from one year to the next) 

• Insufficient funds, overdrafts or negative balances on bank statements within the last three months 

• Large-sum deposits into checking or savings account within the last three months 

An effective LOE should: 

• Be honest, professional and get to the point quickly 

• Clearly describe how the situation occurred 

• Clarify any obstacles/struggles faced at the time 

• Explain how you corrected the situation and how you will prevent it from happening again 

• Express why you feel ready to become a homeowner and what homeownership means to you and your family 

For more information about this letter, contact an INHP advisor. You can also check out an example LOE below. 

________________________________________________________________ 

Date 

To Whom it May Concern: 

This letter is to serve as an explanation for my past (credit, employment or housing) issues. 

In this section, describe all the issues that appear on your credit report and the circumstances surrounding the derogatory item. (Examples: In regard to ABC Credit, this was a phone service that I co-signed for my mother so she would have a phone. She had a bill that was past due, and I did not want her to be without a phone; In regard to the Judgement, this was a medical bill that was eventually paid by my insurance company, and it was released through the court.) 

In this section, describe what you’ve done to keep negative information from appearing on your credit report. (Examples: Now I regularly follow up on medical bills/ obtaining stable employment/ pay all my bills and/or outstanding collections on time; I’ve since learned more about budgeting and money management skills by attending INHP classes.) 

In this section, describe why you are ready for homeownership. (Example: Homeownership is important to me both financially and emotionally. I would like to have a stable place to call my own and a source for investing my money. I want to give my children a backyard to play in and their own rooms. I have always dreamed of owning a home.) 

Thank you for your time and consideration. 

Best Regards, 

(Signature)