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At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation for how we make money. Bankrate logo

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Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our mortgage reporters and editors focus on the points consumers care about most — the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more — so you can feel confident when you make decisions as a homebuyer and a homeowner. Bankrate logo

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You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. When you , you’ll need to hand over a skyscraper’s worth of documentation: your bank statements, tax returns, pay stubs, details on your debt and more. Depending on your financial situation, your lender could also ask for a letter of explanation. Here’s what that means.

What is a letter of explanation

Mortgage lenders ask you to write a letter of explanation in order to better understand your finances when determining whether to approve you for a loan. While your lender’s underwriting department reviews factors such as your credit score and income, those figures might not paint a complete picture of you as a borrower. A letter of explanation helps fill in that picture, offering lenders a deeper understanding of your ability to repay a mortgage.

Why do you need a letter of explanation for a mortgage

When lenders review your application for a loan, their goal is to feel confident you’ll be able to make your . Imagine if you were loaning someone hundreds of thousands of dollars — you’d probably ask for concrete evidence that you’d eventually get that cash back, too. If your lender asks you to submit a letter of explanation, the request is likely linked to a specific piece of information in your application that raised a red flag. A letter of explanation is simply a way to help resolve that red flag, which might include: A job change, particularly in the timeframe leading up to closing Issues from your past that appear on your credit report A new credit card opening or a high credit card balance A large transaction (withdrawal or deposit) in your bank account An unsteady source of income – if you are or an independent contractor, the lender may want a better idea of your earnings It might be wise to proactively submit a letter of explanation, especially if you’re aware of a potential red flag. Put yourself in the shoes of someone reviewing your application: Is there anything that might make you scratch your head? Let’s say you took eight months off work last year to help care for an elderly parent. To the lender reviewing your bank statements, you were unemployed. With a letter of explanation, you can help your lender understand that the decision to temporarily stop working was voluntary. This might alleviate the lender’s concerns about another period of unemployment in the near future.

How to write a letter of explanation

If you need to submit a letter of explanation, be sure to include all the key details of a traditional business letter: The lender’s name and address Your name and your application number The date you’re submitting the letter and expected closing date (if you know it) A short statement that helps an underwriter fully understand your situation in regards to the reason for concern Your current mailing address and phone number

Letter of explanation template

While the format of your letter depends on your circumstances, you can use this letter of explanation template as a example guide: Date Lender name
Lender address
Lender city, state and ZIP Code
Lender phone number RE: Your Name and Application Number Dear Loan Specialist: I am writing to explain the deposit in my [bank name] checking account of $7,500 on January 3. This deposit was a gift from my father to help cover part of the down payment and closing costs for my home purchase. I am attaching another letter from my father, which states that this is a gift and that he does not expect this money to be paid back. I am available to answer any additional questions and look forward to our expected closing date of April 30. Regards, Your name Your mailing address
Your city, state and ZIP Code
Your phone number If you’ve submitted an application with a co-signer, you’ll need to include the co-signer’s name on the letter, as well. It’s important to note that you can make a letter of explanation more compelling with additional documentation. In the example above, the borrower included a from their father that supports the claim that the money will not need to be repaid. Whatever your reason for writing a letter of explanation, consider if there are other pieces of documentation that can back up your claim, and if you have them, submit them.

Tips for writing a letter of explanation

If you need to write a letter of explanation, there’s no need to panic. Follow these three steps to put together strong support for your application:

1 Be honest

The adage of “the truth shall set you free” can be adjusted to “the truth shall help you get approved.” If your lender asks you for an explanation, it’s crucial to share the facts. “When mortgage applicants find themselves in situations that they feel could negatively impact a lending decision, the best advice is simply to be honest,” Pete Boomer, executive vice president at PNC Bank, said. “It is their best interest to fully disclose to the lender the event or events that could impact a decision to lend money.”

2 Be formal

This letter is not the casual email you send to your colleague about lunch. The recipient holds the keys to a new chapter in your life: . With that in mind, approach your letter with a heightened degree of formality. Make your past English teachers proud with pristine spelling, capitalization and business-level construction.

3 Be brief

There’s no need to write a novel. Keep the letter concise, focusing only on the details that need to be covered. Remember that lenders process loads of applications. Rather than make their jobs more challenging with a dense piece of text, focus only on the information they need to review in order to get your application one step closer to approval.

Next steps

Once you’ve submitted a letter of explanation, you’ll have to wait to hear from your lender. Make sure you respond to any additional inquiries quickly. Lenders appreciate borrowers who treat the homebuying process with the importance it deserves. As you’re waiting, make sure you’re prepared for the final piece of the puzzle: the closing. Here’s .

Learn more

SHARE: Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters.

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