Writing an Explanation Letter (With Templates)

Writing an Explanation Letter (With Templates)

Clear communication in potentially problematic circumstances averts misunderstandings. An explanation letter is a useful tool you can use to address academic, work, financial and other situations that need explanation. We delve into useful tips when writing your letter, how to write it, and the documents to attach for a reliable letter of explanation.

What is an Explanation Letter?

An explanation letter is a formal letter explaining situations that stick out in your workplace, credit score or seeking a mortgage through an underwriter. The letter of explanation includes points to why a certain situation is as-is.

What is a Letter of Explanation Template?

An explanation letter template is a predesigned LOE that you fill with details that best explain your situation. There are various templates for explaining situations depending on the circumstance you want to clarify and provide additional information. Common templates are mortgage, credit, deposit, and loan defaults.

Explanation Letter Templates

Letters Of Explanation Template #01

Letters Of Explanation Template #02

Letters Of Explanation Template #03

Letters Of Explanation Template #04

Letters Of Explanation Template #05

Letter of explanation template example

    Explanation Letters for Mortgage

    Letters Of Explanation For Mortgage #07

    Letters Of Explanation For Mortgage #08

    Letters Of Explanation For Mortgage #09

    Bank requirements for default explanation letters

    Change of address

    Dispute

    Payment not found

    Sample – Letter of Explanation for Derogatory Credit

      Explanation Letters for Derogatory Credit

      Letters Of Explanation For Derogatory Credit #15

      Letters Of Explanation For Derogatory Credit #16

      Bad advice

      Closed account

      Confusing home loan accounts

      Letter of Explanation for Credit Issues

        How Does an Explanation Letter Work?

        An LOE or LOX in various situations explains aspects that may raise an eyebrow to the recipient. There are many use cases where the letter of explanation will be effective.

        A mortgage underwriter reviews your DTI score, credit score, financial ability, and history to approve mortgages. You may provide all the necessary documents, but the underwriter’s job is to read between the lines. Letters of explanation are requirements by secondary authorities that back the debt, such as the Federal Housing Administration (FHA). Also, an underwriter may request a letter of explanation if they are unsure of particular aspects of your financial documents.

        Letters of explanation can ameliorate late payments for an overdue loan. You may default on payments due to a change in income or loss of employment. In such cases, LOEs describe your situation, why you cannot pay, and the steps you are taking to resume normal payments.

        When filing credit forms, there is no space to explain contradictory information. You can clear any discrepancies, such as address changes, and indicate employer change through a letter of explanation. Letter of explanation is a useful tool for effectively communicating your situation To Whom It May Concern.

        When and Why Do You Need A Letter of Explanation?

        Letters of explanation clarify any unorthodox information in your mortgage or loan application. Underwriters’ job is to verify your financial ability before approving lenders to finance your mortgage or loan you. Other situations you may need a letter of explanation are:

        • Erratic income. Loss of income or decline in income requires explanation to avoid the lending institution denying you a mortgage.
        • Loss of employment or gaps in employment is usually a red flag to any mortgage application. Write an LOE to explain the situation.
        • Address changes.
        • Late payment on rent
        • Huge deposits or withdrawals in your account. A letter of explanation explains to the underwriter why large transactions occurred in your account if they cannot find valid reasons on their own.
        • Derogatory credit

        The Documents That Go Along With Your Letter of Explanation

        The documents will vary according to your situation. However, general documentation includes:

        • Employment termination letter
        • Credit card statements
        • Doctor’s notes
        • Hospital bills
        • A copy of the inheritance check.

        Note: Underwriters under the privacy law cannot request doctor’s notes. They have to assume the condition is permanent.

        How to Write a Letter of Explanation

        A letter of explanation is the difference between getting your application accepted or denied. Many individuals panic when they receive a request to submit an LOE to the underwriter or loaning institution. Taking your time to think about the reasons that will best explain your situation and finding the necessary supportive documents is essential to a good LOE.

        Using an appropriate template for your situation, state the issue and include the date and an appropriate salutation. Proceed to state the facts with correct figures and dates. Explain why there are discrepancies in your application or clarify contradictory information. Then explain the resolution steps and brief the concerned party on why the problem won’t arise again.

        It is important to include accurate financial information since Underwriters will scrutinize your financial statements, and you may not have a second chance to explain yourself.

        Things to Avoid When Writing a Letter of Explanation

        A good LOE has must-haves. Similarly, there are some things to avoid which will create pitfalls in your loan application. The general things to avoid are:

        • Emotional rant in your letter.
        • Derogatory statements.
        • Lengthy statements. Stay brief and to the point.
        • Do not provide more information than requested.
        • Avoid illegible handwriting.

        Keep in mind to be honest when writing your LOE. Making things up in your letter will have your loan rejected with no delay.

        FAQs

        Why do lenders ask for a letter of explanation?

        When lenders find any discrepancies in your financial statements, such as employment interruptions or delinquencies, they will request a letter of explanation to verify your ability to repay the loan.

        What is a letter of explanation for a mortgage?

        A letter of explanation for a mortgage is a printed or email written letter that an underwriter or lender requests to clarify an unclear situation in your mortgage application.

        How do I write a letter of explanation for a foreclosure?

        After the introduction and salutation, provide a brief description of your foreclosure, why it happened, and how you tried to ameliorate the situation. Provide proof and explain the current situation.

        How do I write a letter of explanation for an underwriter?

        An underwriter verifies every financial statement; therefore, include correct supportive information and assure the underwriter no problem will arise with your mortgage repayment.

        What is a good explanation for derogatory credit?

        A good explanation will depend on the situation. Generally, good explanations for derogatory credit include long unemployed periods, creditor change, and sickness.

        Final Thoughts

        Letters of explanation clear contradictory information and clarify any discrepancies. Ensure you capture the correct information and provide valid explanations of your situation.