Letter of explanation for credit inquiries for mortgage

If you're struggling with your credit score due to multiple credit inquiries, it can be frustrating to feel like you have no way to explain your situation to creditors you want to work with. Fortunately, you can submit a brief letter explaining the situation and letting them know why you'd be a great customer. Use these free templates to get started writing a letter of your own.

2 Sample Letters Explaining Credit Inquiries

To use the sample letters, simply click the letter you want to use and it will open in a separate window or tab as a PDF document. If you have questions about working with the document, this guide to printables can help. Once the file is open, click in the highlighted area to edit. Use the toolbar or File menu commands to save and edit.

Inquiries Due to Refinancing

If you've had multiple credit checks on your report recently due to shopping for a good refinancing offer, you can clarify the situation for the next creditor with a letter similar to the one below. Once they understand the reason for the checks and realize that you only took out a single loan, they may be more willing to lend to you.

Inquiries Due to Opening a HELOC

Sometimes you need to get a new line of credit such as a home equity line of credit (HELOC). To get the best rates, you want to shop around. Unfortunately, that can result in having multiple inquiries into your credit during a short time. You can use a letter like the one below to describe the situation and point out that only one line of credit was opened.

Customizing Your Letter

It's a good idea to end your letter with a brief statement about why working with their company is so important to you. Try something like:

• Financing this car through your bank will allow me to see my family out of state much more often.
• This new home would allow our children to attend the best schools, and we know that XYZ is the best bank to receive a mortgage from.

Tips for Using Letters of Explanation

When you submit a letter of explanation, you want to make sure it follows certain guidelines. Of course, it should be clear and easy to read. In addition:

• Be honest. If your letter doesn't line up with the credit history the lender has discovered, it will make you look even worse as a potential borrower.
• Include documentation. If you assure the bank that a problem has resolved and that you only opened one line of new credit or took one refinance offer, be sure to include proper documentation. That will help back up your claim.
• Keep it brief. The bank doesn't need to know your whole life story. They just need to know why there were so many credit inquiries so they can reconsider your application.

Explaining Your Situation

When there are too many inquiries on your credit report, lenders may turn you down even though you're a good risk. Creating a letter of explanation is simply a matter of writing out the reasons you've had so many checks on your credit report and letting the bank know that you're a reliable borrower. Letters of explanation can be sent to a lender or directly to the credit agencies to be given out with your credit report. Whether you send this to a lender or have it on file at the credit agency, letters like these can help you qualify for credit you deserve.

Your lender asked for a letter of explanation. What now?

When you apply for a home loan, your lender will do a deep dive into your financial history. Depending on what it finds in your bank statements or credit report, additional documentation may be necessary.

You may be asked for a “letter of explanation” during the application process. Fear not. Letters of explanation are fairly standard and nothing to worry about.

However, you want to make sure you write this letter correctly, as it could be crucial to your mortgage approval.

Here’s everything you need to know so you can hit a home run with your letter of explanation.

In this article (Skip to...)

• What is a letter of explanation?
• How to write one
• Sample letter
• Final advice

What is a mortgage letter of explanation?

Commonly referred to as an ‘LOE’ or ‘LOX,’ letters of explanation are often requested by lenders to gain more specific information on a mortgage borrower and their situation.

An LOX can necessary when there is inconsistent, incomplete, or unclear information on a loan application.

Letters of explanation may be required if any red flags turn up during the underwriting process, such as:

• Declining income
• Gaps in your employment history
• Differing names on your credit report
• Large deposits or withdrawals in your bank account
• Recent credit inquiries
• An address discrepancy on your credit report
• Derogatory items in your credit history
• Late payments on credit cards or other debts
• Overdraft fees on an account

There are many other situations where an LOX may be requested, too.

If you need to write one, be sure to ask your loan officer what exactly the underwriter wants to see, and whether you need to provide any supporting documentation along with the letter.

How to write a letter of explanation for your mortgage lender

When it comes to mortgage letters of explanation, less is typically more.

Too much unnecessary information may lead to confusion, or at minimum, additional questions about your file — questions that may have been avoided if it weren’t for some of the details in your letter.

The most important elements of your letter of explanation should include the following:

1. Facts — Be honest. Never be tempted to write a letter based on solely on what you may think your lender wants to hear. You shouldn’t fabricate any aspect of your letter. Include correct dates, dollar amounts, and any other pertinent details for your situation
2. Resolution — Your lender wants to know how and when the situation that led up to certain events was resolved. For instance, if you were temporarily furloughed during COVID, but you’ve since returned to full employment, you should be able to document your recent paystubs and have your employer verify that you’ll continue working full time for the foreseeable future
3. Acknowledgement —This one is important and shouldn’t be left out of your letter. Mortgage underwriters want to know why it is that something happened, and how or why it won’t happen again in the future

Remember that a letter of explanation is a professional document that will go into your loan file.

Be mindful of things like spelling, grammar, and punctuation. Create a letter that’s visually appealing, properly formatted, and communicates the relevant information.

Providing additional documentation with your letter can be helpful. For example, if hospitalization was the culprit behind some missed payments on your credit report, it may be helpful to include hospital bills.

Sample letter of explanation and template

Remember to be honest, formal, and concise when writing a letter of explanation for your mortgage lender.

The exact content will vary based on your situation, but here’s a general letter template you can use as a guide. (Click the image to open a PDF version.)

Remember to include your mailing address, phone number, and the number of your mortgage loan application (or the property address for which you’re applying).

Final advice on writing a letter of explanation

You’ll be asked to submit a pile of documentation during the mortgage loan process, including bank statements, tax returns, pay stubs, and more.

Depending on your financial situation, your lender may also request a letter of explanation. Many first-time home buyers think being asked to provide a letter of explanation means their mortgage application may be doomed.

Remember, this type of request is usually a good thing. The underwriter may be looking for this last item before signing off on your final approval.

When your lender requests a mortgage letter of explanation, remember this first: don’t panic.

Next, double-check with your lender on exactly what is being requested.

Then write a clear, concise letter that’s free of emotional language, negativity, or excessive detail. There’s a good chance that the next time you hear from your lender, it will be to let you know you’re fully approved.