A letter of explanation, often called an LOE, answers one question from the underwriter in your own words. Something on your credit report, bank statements or job history caught the underwriter's eye, and the loan program's rules call for a written reason before it can be counted or set aside.
What usually triggers one
- Recent credit inquiries. On FHA loans, the underwriter usually wants a written explanation for each inquiry on the credit report from the last 90 days, saying whether new credit was opened.
- Large deposits. Fannie Mae treats a single deposit above 50% of your monthly qualifying income as large, and its source has to be explained and documented.
- Late payments, collections or charge-offs. A short account of what happened and why it won't repeat, such as a medical bill or a past layoff.
- Gaps in employment. The dates you were out of work and what you did, such as school, caring for family or a job search.
- Different addresses or names. A line explaining a mailing address, a prior name or a business account that shows up in your records.
What a strong letter looks like
Answer only the question asked. Use plain facts, dates and dollar amounts, and attach proof when there is some, such as a payoff letter or a bill of sale. Sign with the same name that's on the application. Here is the kind of letter that clears an inquiry condition:
To the underwriter: The inquiry from a furniture store last month was my application for store financing to buy a sofa. The account was opened with a $1,900 balance and a $95 monthly payment. I have opened no other new accounts. Jordan Lee, signed and dated.
How one letter changes the math
Jordan earns $5,200 a month. Before the furniture account, the new house payment of $2,050 plus $380 in existing debts came to $2,430, a total debt-to-income ratio of $2,430 ÷ $5,200, or 46.73%.
The letter discloses the $95 payment, so the underwriter adds it:
- New total debts: $2,430 + $95 = $2,525
- New ratio: $2,525 ÷ $5,200 = 48.56%
That's still well inside FHA's 56.9% limit with an automated approval and Conventional's 50%, so the loan moves forward with one new line in the debts. Had the inquiry not led to an account, the letter would say so and the ratio would stay at 46.73%. Telling the full story is always the faster path, because most lenders re-check credit right before closing and a new account would surface then anyway.
Before you write, run the new payment through the DTI calculator to see where your ratio lands. When an explanation request shows up on your approval, call AAA Capital Funding at 888-601-8344 and we'll tell you exactly what the underwriter needs to read.