How to Write a Letter of Explanation for a Mortgage

You’re ready to apply for a mortgage and have all your financial documents ready. Great! But in the back of your mind, there’s that one little red flag you’re not sure about. How do you tell your lender about a financial hardship? Where’s the blank space for I had to change jobs because my company closed, or I missed a payment due to a healthcare emergency? 

Don’t worry! A letter of explanation (or LOX/LOE) can help you fill in the details for financial events that might make your underwriter go “Hmmm.” Below, we’ll show you how to write a great one. 

What Is a Letter of Explanation? 

As we hope you know, your Atlantic Bay team is made up of actual humans who really, really want to help you get a mortgage. And humans understand that not every life event fits perfectly into a box. This is where the letter of explanation comes in – one human writing to other humans to give more details about circumstances beyond just Name and Date of Birth. 

The LOX really is as simple as it sounds, a letter like you’d write to Grandma (hey, another awesome human!), but explaining events like gaps in employment or variations in income. It doesn’t need to be long or written with Shakespeare flair, just hello, here’s what happened and why, and thanks! 

So, what are some situations where an LOX is useful? Let’s take a look. 

Events Where an LOX Can Help 

Employment or income interruptions. Traditionally, lenders review a mortgage application for consistent employment and income for at least two years (although more and more programs are available to modern “gig” workers and the like). Reviewing this background helps demonstrate that you’ll be able to make your mortgage payments. If, in the last two years, you were unemployed or didn’t receive income for a month or more, you’ll want to write an LOX detailing the reasons why; for example: 

• A layoff/downsizing/business closing 

• Family care or childbirth 

• Going back to school 

• Seasonal work 

• Becoming self-employed or starting a business   

Expert Tip

If you kept up regular payments or lived on your savings during your off-time, that’s a powerful argument! Make sure to note it in your letter.

Lack of housing payment history. If you lived temporarily with friends or family instead of paying rent or a mortgage, your “landlord/landlady” will need to write an LOX for you, explaining the dates you lived on the property and that they did not charge you rent.  

Credit issues. If your credit report shows missed payments, bankruptcies, or foreclosures, the LOX is your chance to clarify. State what happened and what you’ve done to correct the situation, such as working with the creditor on a payment plan. Be sure to note the date of the issue, the creditor, and the account number. 

Large deposits or withdrawals. Your lender will look at your bank statements as part of your application, so big lumps of cash coming and going will get attention. Why? 

Big deposits could indicate that you borrowed money and need financial help. (That said, gift funds are perfectly fine – they simply require an LOX of their own, signed by you and the donor.) If you received a bonus from your employer, or other funds for your general amazingness, the LOX is where you can discuss it. 

On the other hand, a large withdrawal can also signal you’re having financial troubles. But maybe there was a medical emergency or critical home repair – explain it in the LOX. 

Purpose of the home. If your potential property is in a different city than where you work, or you’re buying a second home near your existing primary residence, it could hint that you plan to use the new home as a rental. That’s fine; just be upfront about your occupancy intentions. Investment properties and vacation homes are underwritten a little differently than primary residences. Keeping your occupancy intentions to yourself may not sound illegal, but it is. Put your reasons (perhaps you’ll work remotely) in an LOX.  

Name or address discrepancies. Lenders keep a close eye on just who is truly borrowing money. Not only does a high level of caution protect the lender (and you!), but it’s required by law to prevent identity theft, mortgage fraud, and money laundering. If any of your documents have a mistake or don’t quite match up (marriage/divorce name changes, etc.), you’ll want to provide a LOX. 

New credit cards or high balances. New credit accounts or high balances can lower your credit scores and, in turn, your chances of getting a mortgage. An LOX can provide reasons for these situations. 

An LOX is required. In some situations, the LOX is an automatic expectation. For example, Federal Housing Administration (FHA) loans require letters if applicants have collection accounts or judgments. Similarly, if you’re a farm owner and file the Schedule F on your tax return, you’re required to include an LOX with your mortgage application. Include the farm’s address and clarify that it’s not part of the property included with your new mortgage. Have questions about whether you need an LOX? Just ask your Mortgage Banker!

How to Write a Letter of Explanation 

Again, the LOX doesn’t need to be fancy but treat it like a cover letter for a job. Use proper grammar and spelling, with a business-like tone. That said, an LOX only requires some basic elements: 

• Your name, address, and phone number 

• Lender name, address, and phone number 

• Mortgage application number 

• Your concise explanation and any documents supporting it (medical records, etc.) 

• Your signature and the date 

Be specific with your explanation, avoiding general statements like “I’ll do better in the future.” State what happened, when, and what you did to rectify it. As for length, your letter only needs to be enough to cover the situation – a few sentences or, for more complex events, several pages if necessary, plus any supporting documentation.  

Sample LOX 

Atlantic Bay Mortgage Group 600 Lynnhaven Parkway Suite 100, Virginia Beach VA 23452 (757) 213-1660 

Application #12345678  

March 1, 2025 

To Whom It May Concern, 

I’m writing to explain why I did not receive income from November 2 through December 20th, 2024. 

I had my second child on November 3 and, due to complications (please see attached medical documents and letter from my employer), required an extended hospital stay, followed by six weeks unpaid leave. 

During my leave, my husband and I relied on his income as well as our savings. We kept our rent and payments on all accounts up to date. I returned to work on December 27, 2024 and am due for a raise in June of this year. Please let me know if you have any questions.  

Sincerely, 

Jane Johnson 

Jane Johnson 123 Main Street #4 Anytown, KY 42103 270-555-5555 

And that’s that! Your LOX can help smooth any rough edges in your financial history by acknowledging your past circumstances, stating how you addressed them, and how you’ll prevent them in the future. Your Atlantic Bay Mortgage Banker will be happy to guide you – just ask!