What is a late payment letter of explanation?

As its name indicates, a late payment letter of explanation is a letter that accounts for the circumstances surrounding any delinquent or tardy repayments of loan installments or credit card bills. This letter might also explain how your financial situation has since changed and improved and touch on any actions or measures you’re implemented to prevent future late payments.

Do I need to include documents with my letter of explanation?

It can be a good idea to provide supporting documents with your letter of explanation that help back it up. For instance, if your letter is about a gap in employment, you could include a termination document from your old employer to establish you were laid off (and not fired for cause). If you have since returned to the workforce, including recent pay stubs or other proof of the new job and its pay can be helpful. Similarly, if your letter of explanation is about a past credit issue, it’d be a good idea to include a recent copy of your credit report that shows your improved credit score.

How to write a letter of explanation for a mortgage

Written by

David McMillin

and

Erik J. Martin,

Edited by

Troy Segal

Published on September 11, 2024 | 6 min read

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Key takeaways

A letter of explanation for a mortgage is a document that provides further details about an applicant’s creditworthiness or financial circumstances.
The letter of explanation addresses red flags that might derail your approval: why you were unemployed for a period of time or why there’s an unpaid balance on your credit report.
Not every borrower needs to write a letter of explanation. If you do, your lender will request one.

When you apply for a mortgage, you’ll need to hand over plenty of documentation: your bank statements, tax returns, pay stubs and details on your debts, to name just a few. Depending on your financial situation, your lender could also ask for a letter of explanation.

It’s an important document, one that could make all the difference in your getting money to buy that new home — or not. Let’s explain everything you need to know about mortgage letters of explanation.

What is a letter of explanation?

A mortgage lender might ask you to write a letter of explanation to better understand your finances when deciding whether to approve you for a loan. While your lender’s underwriting department reviews factors such as your credit score and income, those figures might not paint a complete picture of you as a borrower — especially if you haven’t much of a credit history. A letter of explanation helps fill in that picture, offering lenders a deeper understanding of your ability to repay a mortgage.

If a lender asks you to submit a letter of explanation, think of it as a requirement – not an optional request. The lender needs further clarification on some matters, and your response could be the pivotal point in your being granted or refused financing.

Why do you need a letter of explanation for a mortgage?

If your lender asks you to submit a letter of explanation, the request probably reflects a particular piece of info or irregularity in your mortgage application that raised a red flag. A letter of explanation is simply a way to help resolve that red flag, which might include:

A job change: If you change jobs, particularly in the time frame leading up to closing, you might need to explain why you made the switch.
Issues on your credit report: Perhaps you were delinquent on past debt payments. Your letter of explanation accounts for your tardiness or other issues.
A new credit card opening or a high credit card balance: Applying for and opening a new credit card or having a high credit card balance might hurt your credit (which in turn affects what sort of loan interest rate you’ll be offered or if you get a loan offer at all). Your letter of explanation gives valid reasons for these situations, especially if they dinged your credit score.
A large transaction in your bank account: The lender might want more details on the withdrawal or deposit of a big lump sum that isn’t a regular occurrence. (If the deposit was a present to help meet the down payment, a gift letter could explain it.)
An unsteady source of income: If you’re self-employed or an independent contractor, the lender might want a clearer sense of the stability of your earnings.

If any of these potential red flags apply to you, it might be wise to proactively submit a letter of explanation. Put yourself in the shoes of someone reviewing your application: Is there anything that might give them pause?

Let’s say you took eight months off work last year to help care for an elderly parent — an unpaid leave. To the lender reviewing your bank statements, you appear to be unemployed during that time. With a letter of explanation, you can help your lender understand that the decision to temporarily stop working was voluntary. This might alleviate the lender’s concerns about another period of unemployment in the near future.

Learn more: Understanding the mortgage underwriting process

How to write a letter of explanation

There’s no need to panic if a lender requests a letter of explanation: It’s a common part of being granted conditional approval for the loan. Still, it’s important to do the job right. To begin with, include all the key details of a traditional business letter — whether you’re mailing it or uploading a digital copy:

The lender’s name and address
Your name (as it appears on your application) and any client/reference/file number
Your current mailing address, email address and phone number
The date you’re submitting the letter and the expected closing date of your home purchase (if you know it)
A summary statement or short intro that quickly helps an underwriter identify the topic under discussion
Any details that may be relevant to the lender’s decision-making: dates, dollar amounts, and account information may apply. If you have paperwork to back up this information, be sure to include it as an attachment
Relevant information about your spouse or other co-borrower, if you have one
A courteous closing

Be short and to the point. While your goal is to explain your financial situation, remember you are providing plenty of other context with your loan application, usually including bank statements. Keep this letter professional and specific to what the lender has asked for clarification about.

5 tips for a good letter of explanation

Keep the following tips in mind:

Write honestly: It’s crucial to be transparent. All of the information you provide should be factual and correct. It’s also important that all dates or dollar figures included in your letter are accurate.
Write briefly: Share the facts, but stick to the facts: There’s no need to write a whole narrative. Too much information, editorializing or unnecessary detail could result in confusion or may spark more questions in the lender’s mind.
Write professionally: Approach your letter with a heightened degree of formality. Make your past English teachers proud with pristine spelling, capitalization and business-like, careful composition.
Provide a clear explanation: Your letter should acknowledge and indicate why something happened. If, for instance, you fell behind on loan payments in the past or were out of work for a significant period of time, explain the extenuating circumstances.
Include resolution details: It’s also a good idea to indicate outcomes, describing how you resolved the challenge or issue: regaining employment or catching up on past-due payments, or your plan for doing so.

Sample letter of explanation

While the exact content of your letter depends on your circumstances, you can use this sample letter of explanation to a mortgage lender as a template:

Sample letter of explanation

Date

Lender name

Lender address

Lender city, state and ZIP code

RE: Your Name and Application Number

I am writing to explain the absence of any payroll deposits in my [bank name] checking account for the months of January and February of this year.

During those two months, complications arising from my son’s birth required me to take an unpaid medical absence from my employer, under the Family and Medical Leave Act (FMLA). I have since returned to work, in my previous position and with full pay. I am attaching another letter from my employer, [its name], which verifies my active employment status, the date I resumed work and my salary.

I am available to answer any additional questions and look forward to our expected closing date of May 30.

Regards,

Your Name

Your mailing address

Your city, state and ZIP code

Your phone number and e-mail address

If you’ve applied with a co-signer, you’ll need to include the co-signer’s name on the letter, as well.

It’s important to note that you can make a letter of explanation more compelling with supporting data and paperwork. In the example above, the borrower includes a letter from their employer that supports the claim that they have returned to work after an authorized leave of absence.

Whatever your reason for writing a letter of explanation, consider if there is other documentation that can back up your claim. If those documents are available to you, submit them together with the letter to make the lender’s review process as easy and streamlined as possible.

What to do if your letter of explanation is rejected

Be prepared: The lender that requests your letter of explanation might ultimately reject it. In this scenario, don’t give up. Review your old explanation for anything you might have accidentally left out. Consult your mortgage officer or broker, if you have one, to see what other information you may need to include. Compose a new letter, with more details and documentation.

If your second try fails, give thought to starting the mortgage application process over again with a different lender. Just be aware that other lenders might also request a letter of explanation.

If you’re still encountering difficulties in getting loan approval, you might consider postponing your home search and working harder on improving your credit (if that has been the main issue of concern). By following best practices — including paying your bills on time, not opening new credit accounts and avoiding high credit card balances — you can raise your credit score and your chances of getting approved for a loan in the future.

Letter of explanation FAQ

As its name indicates, a late payment letter of explanation is a letter that accounts for the circumstances surrounding any delinquent or tardy repayments of loan installments or credit card bills. This letter might also explain how your financial situation has since changed and improved and touch on any actions or measures you’re implemented to prevent future late payments.
It can be a good idea to provide supporting documents with your letter of explanation that help back it up. For instance, if your letter is about a gap in employment, you could include a termination document from your old employer to establish you were laid off (and not fired for cause). If you have since returned to the workforce, including recent pay stubs or other proof of the new job and its pay can be helpful. Similarly, if your letter of explanation is about a past credit issue, it’d be a good idea to include a recent copy of your credit report that shows your improved credit score.