Finally, you’ve found the perfect house. The present owners have agreed to your offer, your lender asks for a rent-free letter, and panic starts to set in. Do not panic. These kinds of requests are more common than you may believe. Lenders typically require a rent-free letter to verify your housing history, regardless of whether you’ve been living with relatives, occupying a residence without paying rent, or without having a formal lease.

Get A Free Mortgage Quote

We’ll go over what an explanation letter is, why it’s required, and how to create one that is effective, honest, and concise in this article.

What is a Letter of Experience?

Imagine finding the right home loan counselor in the maze of mortgage approval and coming across two interesting hints: “Letter of Explanation Mortgage” and What is LOE? Consider LOE as a great chance to point out problematic parts of your financial history before insurers start looking into it.

To put it simply, a letter of explanation for a mortgage is a document that prospective homebuyers provide to lenders in order to clarify any concerns or questions that may come up during the mortgage underwriting process. This letter gives you a chance to proactively explain any financial setbacks you may have had, like lengthy unemployment or major withdrawals from your bank account. If completed properly and on time, an LOE may be your opportunity to expedite the approval of your mortgage.

Who Needs a Letter Of Explanation?

A letter of explanation may be needed from new homeowners for an array of reasons. Now, let’s get into the details:

Lender requirements: Homebuyers should know that some lenders may have different paperwork needs, even if the LOE is different for all mortgage providers. Stricter paperwork standards may be in place for mortgage providers who provide expert lending programs, like government-backed loans for first-time homeowners. Federal Housing Administration (FHA) loans are one example of this.
Jumbo loan use: A large loan exceeds conforming loan limitations. To gauge what sort of risk a jumbo loan might pose, lenders want more documentation. For example, they may require a Letter of Explanation.
Things that don’t look good on a credit report: These might well impact your mortgage application if you include them. Late payments and bankruptcy are examples of those negative items. To put the preceding into context, you’d have to pen a letter for your lender saying why it was late.
Extended lapses in employment: An extended term of unemployment or breaks in employment may create concerns regarding your loan repayment capacity.
Large bank transactions: Large deposits or withdrawals from your bank account may trigger red flags for lenders. This might be a sign of possible financial instability.
Income that changes a lot: Lenders may want more proof that you can pay your mortgage each month if your income is always changing.

Tips On How To Write A Letter Of Explanation

The letter of explanation must be clear and straightforward, the same as any business letter you send. While the content of the letter will differ based on the situation at hand, make sure to:

Give as much information as you can, including accurate dates and quantities in dollars.
Describe how and when every dispute was settled. Additionally, if they are not resolved, explain that.
Describe the reasons why issues won’t recur.

Keep in mind that you are the only one who can adequately describe your circumstances. Don’t have the letter written by someone else.

What A Letter Of Explanation Should Include

Here are some things you should include in your letter:

Name, phone number, and postal address
The date
The loan application number
Name, location, and phone number of the lender
Your justification, cited in any supporting documentation you’re providing

Before sending your letter, don’t forget to attach copies of any supporting evidence.

Examples Of Letters Of Explanation

Here are some examples of numerous explanations for why you may need to write a letter of explanation. Don’t forget to be concise and confine your discussion to the facts. Give only the desired information; lack a lot of extra history or details.

Example 1: An auto payment that is late

John Smith, Anytown, US 00123, 123 Main St.

January 7, 2025

About: 5142300 mortgage application

Dear Mr. or Ms. (name of the person trying the explanation letter),

The issue on my credit report that you asked about is clarified in this letter: Late payment on an auto loan due on May 1, 2020, to First Auto Bank.

In April 2020, I lost my job at my previous employer due to restructuring amid the COVID-19 epidemic, and I could not pay my $550 May automobile payment. Thankfully, I was able to get a new work in late May, and I paid the late charge and the back payment.

I want to make all of my payments on time and in full, as I am well aware of the responsibility associated with having a mortgage. I really hope you will give my application a little thought.

Regards,

(Name)

Example 2: Delinquent medical bill

This letter is to explain the delinquent medical bill that appears on my credit report to Boston Medical Center.

Because I have never seen the provider listed on this bill, I believe that I was billed in error, and I initiated proceedings to dispute the bill on October 1, 2024. I haven’t received a response yet regarding the dispute. I pay my medical bills on time and have no other late or missing payments or delinquent accounts on my credit history.

Example 3: Large deposit

This letter explains the item you asked about on my bank statement.
We sold our second car recently, a 2011 Honda Fit, to (name of recipient) and deposited the proceeds, $7,000, into our checking account at First Bank on September 9, 2024. I am including the receipt for the sale of this car.

What Happens If You Submit A Letter Of Explanation?

Once you send in your letter of explanation, it may take several days before you hear back. To keep from delaying your loan application, respond right away if a lender asks for additional information.
If the lender approves your loan, you may proceed to acquire your home. Congratulations! The letter of explanation you worked on has paid off.

An adverse action notification outlining the reasons for the refusal will be sent to you by the lender if your loan application is rejected. If this happens, you may wish to deal with another mortgage provider or address any concerns the lender has. You could have a higher chance of getting permission later on if you do this. You’ll be better prepared the next time if you understand what it takes for a lender to accept your mortgage application.

Although a rent-free letter may seem to be just another formality, it’s really a chance to show lenders your integrity, responsibility, and reliability. A succinct and straightforward letter will help keep your mortgage application on pace, whether you’re describing an economic setback or providing background information for a professional shift.

Get A Free Mortgage Quote

Be real, take your time writing it, and provide supporting proof where necessary. Transparency is taken seriously by lenders, and your efforts may be the difference that makes your loan final.

Letter of Explanation: What It Is and How to Write One

Letter of Explanation: What It Is and How to Write One