Letter of explanation (LOE)
A written statement from the borrower explaining an unusual item in the application: a large deposit, a credit inquiry, a gap in employment, a recent address change, or a derogatory credit item. LOEs are requested by underwriters to document that unusual items have a reasonable, documented explanation.
How it works in practice
Letters of explanation exist because underwriting files must document anything a reviewer (or auditor) would question. The classic triggers: a deposit large relative to your income, recent credit inquiries, an employment gap, address history that doesn't match documents, a past derogatory item, or — for the self-employed — a revenue dip in one stretch of bank statements.
The craft is brevity plus paper. State the fact, date it, attach the document that proves it, stop writing. "The $18,500 deposit on March 3 was the documented sale of my 2019 truck — bill of sale attached" is a complete LOE. Narratives, justifications, and emotion add risk with every sentence: an LOE is evidence for the file, and volunteered detail can raise questions the underwriter never asked.
Treat requests as routine, not ominous — several LOEs per file is normal, and conditions clear fastest when responses come back same-week with attachments. The strategic version is preemptive: business owners who log unusual deposits as they happen (a one-time contract, an equipment sale, an insurance payout) hand the lender explanations before being asked, which reads as exactly the documentation discipline underwriters want to see.
Common questions
Is being asked for an LOE a bad sign?
No — it means underwriting is proceeding and documenting normally. Files close with multiple LOEs all the time. The bad sign is an explanation without support: whatever the letter claims should arrive with the paper that proves it.
What should I never put in an LOE?
Speculation, blame, and unrequested history. Answer only the question asked, factually and with documentation. If a circumstance is genuinely complicated, a call with the loan officer to agree on accurate, minimal wording beats improvising on paper.
Related terms
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- Verification of Employment (VOE) — A document or direct lender contact that confirms your employment status, position, and income. For self-emplo…
- VOD (Verification of Deposits) — Bank confirmation of account balances, used to verify down payment and reserve funds. Lenders may request VODs…
- Tax transcripts (IRS 4506-C) — The IRS form lenders use to request your tax transcripts directly from the IRS, verifying that the returns you…
- P&L statement (Profit and Loss) — A business income statement showing revenue minus expenses over a period. For mortgage purposes, a P&L must be…
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Sources
Educational definition only — not financial, legal, or tax advice. Programs and limits change; verify current terms with a licensed professional.