Most borrowers receive at least one request for a letter of explanation during underwriting. The request often arrives as a single line on a condition list: "LOE for deposit on March statement," or "LOE for credit inquiries." It can feel like the lender is asking the borrower to defend themselves.
The purpose is narrower and more practical than that. The underwriter has found something in the documents that needs a reason. A letter supplies the reason, and the documents prove it.
Underwriters verify every number in a file against a document. Sometimes the documents raise a question they cannot answer on their own:
The guideline often requires the underwriter to obtain an explanation for these items. The letter tells the underwriter which story to test against the paperwork.
A strong letter is short and specific. It includes:
The best letters answer the specific question asked and nothing more. A letter about one deposit should explain that deposit. A letter about a late payment should name the account, the month, the reason, and the fact that it was brought current, if that is true.
Compare two letters about a late payment. One says, "I was late because of a hard time." The other says, "My payment on the auto loan with the named lender was 30 days late in the named month because my paycheck was delayed when I changed payroll providers. I made the payment the following month and have paid on time since." The second letter gives the underwriter something to verify against the credit report.
A letter explains. Documents prove. Most explanations need both.
For a large deposit, the letter says what the money was, and a document shows it: a transfer record from another account in the borrower's name, a gift letter with evidence of the donor's withdrawal and the transfer, a payroll record for a bonus, a closing statement from a sale, or a tax refund record.
Fictional example: consider a bank statement showing a deposit much larger than the borrower's payroll pattern. The borrower writes that it was a federal tax refund and includes the refund record from the IRS or the bank's deposit detail showing the source. The underwriter matches the amount and the date, and the condition clears. A letter saying "it was my money" with no trail leaves the condition open.
For an employment gap, the dates in the letter need to match the application and the employment verifications. If they do not match, the fix is to correct the application instead of writing around it.
Underwriters compare the letter to the credit report, the statements, the pay records, and the application. A letter that tells a better-sounding story than the documents support creates a bigger problem than the original question. A false statement on a mortgage application or in supporting documents can be a federal crime.
A plain, accurate letter is always better. If the reason was ordinary, say so. If the borrower made a mistake, say so and explain what changed. Underwriters see real life every day. They are looking for a reason that ties to the record.
The letter should be written and signed by the borrower the fact belongs to. If a co-borrower's account shows the deposit, the co-borrower explains it. One borrower's guess about the other's finances does not satisfy the condition.
For gifts, the donor signs the gift letter, which is a separate document with its own required contents under the program's rules. The borrower may also write a letter of explanation about the timing or the transfer.
A letter cannot remove a debt from the debt-to-income calculation. A debt is excluded only when it is paid off, released, or when the guideline says it does not count, such as some debts paid by another party with documentation. The letter can explain the situation, but the documents and the rule make the decision.
A letter also cannot change the guideline. If a program requires a waiting period after a credit event, a letter explaining the event does not shorten that period.
The easiest letters are the ones a borrower expects. A borrower who knows the file has a recent job change, a deposit from selling a car, a past bankruptcy, or a name change can mention it at the first conversation. The loan officer can then say which documents will be needed and gather them with the rest of the file, so the explanation arrives with its proof instead of as a later condition.
Early disclosure also protects the timeline. A question that surfaces in underwriting a week before closing has to be answered under pressure, and some answers take time to document, such as a bank's record of an old transfer or a court document from a past event. The same question raised at application is just another item on the list.
It also keeps the story consistent. When the application, the documents, and the letter are prepared together, the dates and amounts line up the first time.
A letter can follow a simple pattern:
Short is fine. The underwriter is matching the explanation to the documents, so clarity matters more than length.
An explanation and an excuse are different things. The underwriter is tying an amount or a date to a cause, and the letter's job is to make that connection clear.
A request for a letter is routine. Most files have at least one.
The automated finding and the program guide decide what needs an explanation. A letter does not add a rule; it answers the one that applies.
Fictional example: an underwriter asks about three inquiries in the last 90 days. The borrower writes one short letter: the first inquiry was a mortgage shopping pull from another lender, no new account; the second was an auto lender, which led to a new car loan already shown on the credit report with its statement attached; the third was a store card application that was declined. Each line matches the credit report's dates. The underwriter adds the car payment to the debts, which it already had, and the condition clears.
Gift funds have their own required letter from the donor; see gift funds. For how a condition list moves toward closing, see conditional approval.
If you know your file has a deposit, a gap or a credit event that will need an explanation, tell me at the start and we will gather the proof with the rest of your documents. Book a call, or start an application.
Links checked Oct 21, 2026.
About the author: McKade Lively, NMLS 2704474, American Pacific Mortgage Corporation dba True North Home Loans, NMLS 1850.
Equal Housing Opportunity.
Last reviewed: Oct 2026