Learning About Letters of Explanation

When you receive a mortgage loan from a reputable mortgage company like City Creek Mortgage, an important part of the process will be underwriting. During this process, the underwriter might ask for what’s called a letter of explanation, or LOE.

Some potential borrowers panic when they get this sort of request, but you should not do so. An LOE is not necessarily a bad thing, and is often quite the opposite – it’s often clarification for a very good outcome. Here are all the basics you need to know.

Why Lenders Ask for Them

Simply put, letters of explanation are asked for so that lenders can receive clarification on a particular financial area. This is usually related to credit and underwriting requirements, which are imposed by government organizations and require a mortgage company to be very diligent with their criteria.

As an example, you might be asked for a letter of explanation regarding a negative entry on your credit report. This requirement might come from the lender, or it could come straight from underwriting guidelines imposed by the FHA or Freddie Mac.

Common LEO Situations

There are a few common situations that might result in you being asked for a letter of explanation:

  • Large withdrawals or deposits from a bank account, especially if a source or good reason cannot be easily determined.
  • High levels of debt in relation to your income.
  • Negative entries on a credit report, including delinquencies, foreclosures, missed payments and more.
  • A banking fee that suggests you may have had issues managing your finances in the past – an overdraft fee is a simple example here.


Letters of explanation are all about simplicity and clarity. Explain what happened, why it happened, and provide any details of the situation. Be succinct without leaving anything out, and enclose all possible documentation that might be needed to help clarify the issue. Be as specific as possible, including dates and dollar amounts.

For more on letters of explanation, or to find out about any of our services, speak to the pros at City Creek Mortgage today.


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