Guide To Letters of Explanations (LOEs) for DSCR Loans

A Letter of Explanation (LOE) is a written statement from the borrower (guarantor or guarantors) that addresses a specific question or concern raised during the underwriting process. In DSCR loans, LOEs aren’t as frequent as in traditional DTI-based loans, but when they are requested, they are critical. They are most commonly used when there is an exception, or approval request for a DSCR Loan where the borrower doesn’t fully qualify under the guidelines, but the DSCR Lender may deem the specific situation and risk acceptable. They can also be common when there are legitimate servicing or reporting errors that are validly not the borrower’s fault, but need to be documented as such.

While LOEs are generally going to be unique to each specific borrower and situation, there are some standard best practices for borrowers when required to complete them. These include keeping them clear, factual, and concise and avoid unnecessary personal detail and to address the question or issue directly and provide only relevant and needed context. LOEs should include dates, amounts, and names where applicable and the document should be fully signed and dated before submission.

While LOEs are by definition, documents for unique and extraordinary situations, there are some common examples of when they are needed for DSCR Loans. Many are connected to the specific attestation questions found on the loan applications (which generally cover risk areas that may not show up in the standard due diligence documents) or to address flags in the borrower’s (guarantor) past, such as criminal history or severe credit events. Generally, DSCR Lenders are amenable to overlooking even serious past blemishes, provided the events were long enough in the past and that there is a valid explanation for how the borrower has changed. This is typically where LOEs most likely come into play.

Common Situations Where a DSCR Lender May Require an LOE

Scenario	Why It Triggers an LOE	What DSCR Lenders Are Looking For?	How to Best Address It in an LOE
Past Criminal History	Any felony conviction (even from many years ago) on a background check must be addressed.	How serious was the crime? How long ago was the crime? Has the borrower changed significantly from when it happened?	Typically, outside of the most serious criminal felonies (i.e. murder, rape, etc.) or felonies directly related to real estate or mortgage fraud, criminal convictions will be okay as long as they are significantly in the past (10+ years). Typically, DSCR Lenders will accept strongly written LOEs in these situations that detail how a person has matured and changed significantly since a youthful criminal history and learned from mistakes, while also showing a clean record in recent years.
Recent Credit Event such as Bankruptcy, Foreclosure, Short Sale or Deed-In-Lieu in the last 7 years	These major credit events are addressed in specific guidelines and rules, yet more context is required since it indicates serious issues managing credit.	What led to and caused the bankruptcy, foreclosure, short sale or deed-in-lieu? What has the borrower done since to learn from the credit event and prevent future ones?	Generally, these credit events will have specific rules and guidelines for DSCR Lender treatment, but because of the seriousness of bankruptcies and foreclosures (or foreclosure equivalents) and the elevated risk, further context on how the borrower has learned from mistakes and any indications on future outlook can help DSCR Lenders get more comfortable, especially if any “exceptions” are needed.
Outstanding Judgments	Judgments can result in liens or garnishment, affecting the ability of the borrower to cover any needed PITIA shortfalls from the property, and can indicate less reliability of liquid asset reserves.	Is the judgment satisfied or subject to an active repayment plan? Has the borrower demonstrated financial responsibility since?	The best LOEs will clearly state whether the judgment has been paid in full or is under an active, documented repayment plan, ideally supported by court or payment records. Borrowers should note if it arose from a unique or isolated event and outline steps taken to avoid similar issues in the future.
Party to a Lawsuit	Litigation could result in financial judgments or encumbrances on the property, which can complicate borrower’s credit and any needed foreclosure or recourse claims in the event of a default.	Could the lawsuit result in a lien or other impact on the property or borrower finances? What is the likelihood or timeline of resolution?	Lenders want to know whether the borrower is a plaintiff or defendant and what financial exposure exists. A concise LOE should describe the nature of the case, potential financial impact, expected timeline, and include attorney correspondence if available confirming limited exposure or that insurance coverage applies.
Obligation to Pay Alimony, Child Support, or Separate Maintenance	While DSCR Loans don’t use DTI, ongoing obligations can affect cash flow for property expenses.	What is the monthly amount, duration, and payment status of these obligations?	LOEs should include documentation such as divorce decrees or court orders verifying the obligation, payment history, and remaining duration. Clarifying that payments are current and manageable relative to available reserves can help offset lender concern.
Presently Delinquent or in Default on Federal or Other Debt	Default on federal debt can disqualify a DSCR Loan; other defaults may indicate repayment risk.	Has the debt been resolved, and is the borrower in good standing with all creditors?	Borrowers should use the LOE to show the issue is fully resolved — ideally including evidence of repayment, rehabilitation, or clearance letters. If still in process, explaining corrective steps and demonstrating responsible handling since the default is essential.
Undisclosed Liens on the Subject Property	Undisclosed liens can prevent the DSCR Lender from obtaining first lien position or reduce equity.	What is the lien amount, purpose, and resolution plan?	The LOE should explain the lien’s origin (e.g. tax lien, contractor dispute), whether it has been paid off or subordinated, and include supporting documentation showing clear title by closing. Transparency and a timeline for release are key.
Address or Occupancy Discrepancy	If borrower’s ID shows the subject property address but they now live elsewhere, underwriters need clarification on past occupancy and current use.	When did the property convert from personal residence to rental, and who occupies it now?	Borrowers should outline the timeline of events: when they moved, when the property was leased, and current lease details or Airbnb operation info. Including a lease agreement or utility bills supporting the transition helps confirm non-owner occupancy compliance.
Large, Unusual Financial Transactions	DSCR Lenders must confirm that funds are from acceptable, non-borrowed sources.	What is the source of this $75,000 deposit shortly before application? Is it business revenue, sale proceeds, or a gift?	LOEs should trace the deposit clearly, e.g. sale of another asset, partner capital contribution, or transfer from another owned account, and attach corroborating bank statements or sale documentation. The key is showing it is not borrowed or laundered money and is verifiable.
Name Discrepancy or Multiple Aliases	Necessary for identity verification and compliance checks.	Are both names on credit and legal records legally yours, and is there supporting documentation?	A short, factual LOE should explain any prior names, legal name changes, or use of aliases (e.g. maiden name, business name). Including copies of ID, legal name change documents, or marriage certificates ensures lender can match records and clear compliance checks.

When answering the Declarations section or addressing other LOE triggers, borrowers should always be truthful and thorough. Submitting a proactive and well-written LOE early often clears conditions quickly and prevents last-minute delays or worse.

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