Letters of Explanation on Bank-Statement Loans

On a bank-statement loan, the statements tell the income story. When something on them doesn't fit the story, such as a big deposit, an overdraft or a dip in revenue, underwriting asks the borrower to explain it in writing. A good letter of explanation (LOE) answers the question once. A vague one comes back as another condition.

Here are the LOEs that come up most, what published guidelines say about each, and an outline you can hand the borrower.

Educational only, not legal or underwriting advice. The borrower must write and sign their own explanation, and it must be true. Never draft facts for them.

1. Large deposits

Agency files. Fannie Mae's Selling Guide lists "the borrower's written explanation" as one example of acceptable documentation when a borrower can't fully document a large deposit on a purchase. Others include proof of ownership of an asset that was sold, or a wedding invitation supporting receipt of gift funds. The lender must also put written documentation of its rationale for using the funds in the file. [1]

Remember the scope: on a purchase, this applies when the large-deposit funds are needed for the down payment, closing costs or reserves, and only the unsourced portion is compared with the 50% threshold. [1] See article 10 for the documents that usually work better than a letter alone.

Non-QM income files. Programs also review deposits for income consistency. Plaza says inconsistent or large deposits should be sourced or excluded, and that "changes in deposit patterns must be explained." [2] See article 11.

2. NSFs and overdrafts

• The Silver Hill program sheet requires "a satisfactory LOE" for NSFs and overdrafts. [3]
• Plaza's snapshot says an exception request for exceeding its NSF tolerance must include a borrower LOE explaining the reason for the occurrences and how and when the issue was fixed, plus compensating factors from the underwriter. [2]

So an NSF letter should cover what happened, when it was fixed, and why it won't recur, not just "it was a timing issue." For counting rules, see article 03.

3. Declining income

Arch Mortgage Funding's calculator instructions say that if income has declined by more than 20% from its previous higher level, the underwriter must do a thorough review, and one requirement is a letter of explanation from the borrower detailing the reason for the decline. The underwriter must also determine that income has stabilized and give written justification for using it. [4] See article 17.

4. Business narrative (not an LOE, but often confused with one)

Many programs want a description of the business itself:

• Newfi's correspondent matrix requires a business narrative, completed by the borrower or loan officer, when business or co-mingled statements are used. It must be in the file before submission. [5]
• Plaza's narrative covers the industry, size and operating profile: location/rent, employees and contractors, COGS and physical assets. [2]
• Angel Oak's Bank Statement Questionnaire asks for company details, ownership %, a business description, account type, employee count and whether the business runs from home. [6]

Get these at application. They explain what "normal" looks like, which makes later LOEs easier.

A simple LOE outline

Give the borrower this structure and let them fill it in:

1. Header: date, borrower name(s), property address or loan number.
2. The item: one line naming exactly what's being explained, e.g. "Deposit of $X on [date] to account ending [last 4]."
3. The explanation: what it was, in plain words.
4. The evidence: what's attached (invoice, bill of sale, bank record, gift letter).
5. For recurring issues: what changed so it won't happen again.
6. Signature of every borrower on the account.

One item per paragraph. Keep it factual and short.

Tips that save a round-trip

• Ask for the evidence with the letter. A letter that points to an attached document beats a letter on its own.
• Match the numbers exactly to the statement: date, amount, last four of the account.
• Explain every flagged item in one pass. Review all statements before requesting LOEs so the borrower isn't asked three times.
• Don't let the borrower over-explain. Extra, unrelated detail can raise new questions.

Sources (checked 2026-10-15)

Lender rules as published on the sources_verified date; check the current guide before relying on them.

1. Fannie Mae Selling Guide, B3-4.2-02, Depository Accounts ("Evaluating Large Deposits"): https://selling-guide.fanniemae.com/sel/b3-4.2-02/depository-accounts
2. Plaza Home Mortgage, Solutions Non-QM 1 Product Snapshot (PDF, © 2025): https://www.plazahomemortgage.com/DownloadFile.aspx?FileName=Solutions+Non-QM+1+Product+Snapshot.pdf&FilePath=%5CDocuments%5CPlazaPrograms%5CSolutions+Non-QM+1+Product+Snapshot.pdf
3. Bank Statement product sheet (© 2025 Silver Hill Capital), hosted at https://www.lakeviewcorrespondent.com/wp-content/uploads/2025/07/Bank-Statement-.pdf
4. Arch Mortgage Funding, Bank Statement Income Calculator (XLSX, © 2026), Calculation Instructions tab, linked from https://mortgage.archgroup.com/arch-mortgage-funding/calculators/ (file: https://mortgage.archgroup.com/wp-content/uploads/sites/4/MCUS-1531AMF-23J-AMF-Bank-Statement-Income-Calculator.xlsx)
5. Newfi Correspondent, Delegated Plus NQM Product Matrix, effective January 13, 2025 (PDF): https://newficorrespondent.com/wp-content/uploads/2025/01/Correspondent-Delgated-Plus-NQM-Product-Matrix.pdf
6. Angel Oak Mortgage Solutions, Bank Statement Questionnaire (PDF): https://angeloakms.com/wp-content/uploads/Bank-Statement-Questionnaire.pdf

Sources 2, 3 and 5 are correspondent or product documents. Wholesale (broker) guidelines from the same companies may differ.

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