The Quick Read: A letter of explanation is a standard underwriting tool, and it is the one you are far more likely to be asked for. A “letter of intent” is looser. On a cash-out refinance it usually means a short written statement of what the cash is for. Neither is an agency rule, so confirm with your loan officer which one the lender wants.
The letter of explanation is for a borrower whose file raises a question: a large deposit, a recent credit inquiry, a late payment, a change in who is on title. The letter of intent is for a borrower whose lender wants the purpose of the cash in writing. Many cash-out files need neither, because nothing in them prompts a question and the lender does not ask for a purpose.
Cash-out refinance estimate
The starting figures are an example value with a balance and a cash request in proportion. Replace them with yours.
Editable benchmark: 7.18% as of November 5, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not a cash-out refinance quote.
Illustrative starting assumptions: a $350,000 home value, a $193,000 current balance, the agency cap on a one-unit principal residence, a thirty-year term at the current Freddie Mac benchmark, and property taxes and insurance estimated at typical national rates. Every field is editable.
Illustrative estimate only — not a Loan Estimate, approval, quote, or commitment to lend. The rate field carries the weekly Freddie Mac thirty-year conventional benchmark, a market reference and not a cash-out refinance quote; a cash-out loan is priced by the lender at lock. The cash available is the loan the program cap allows less the balances paid off, before closing costs, which are not included. The HELOC line is the program’s combined loan-to-value ceiling applied to the same value and balance. Taxes and insurance are editable estimates. Licensed in sixteen states for consumer mortgages.
The agencies do not require a use-of-funds letter. Freddie Mac defines a cash-out refinance as a mortgage with no specific restrictions on how the proceeds are used. Any “what is the money for” letter is therefore lender practice, not a regulatory condition. That distinction shapes everything below.
Side-by-Side
| Factor | Letter of Explanation | Letter of Intent (purpose letter) |
|---|---|---|
| What it does | Answers a specific question in the file | States what the cash will be used for |
| Who asks | Underwriter, when the file needs it | Some lenders, as their own practice |
| Required by agencies? | No blanket rule; used as needed | No agency rule found |
| Typical triggers | Deposits, inquiries, late payments, title changes | Cash-out requests |
| Can it change eligibility? | No | No |
| Documentation | Signed note plus backup documents | Short signed statement |
Look at the eligibility row. Leverage, credit floors, mortgage insurance and occupancy all come from the loan program, not from your prose.
When a Letter of Explanation Is the Better Fit
The letter of explanation fits any time the file raises a flag the underwriter cannot resolve from the documents alone. It is a signed note, factual and short, that answers one question and points to proof.
Common triggers look like this:
- A large deposit that does not match your usual paychecks.
- A recent credit inquiry, which suggests you may have opened new debt.
- A late payment on a credit report.
- A gap in employment.
- A change in who is on title.
Say you sold a car and deposited the proceeds. The deposit looks odd on a bank statement. A two-line letter, with the bill of sale attached, closes the question. That is the whole job of an explanation: one fact, one document.
The letter also matters because cash-out files get closer scrutiny than the simplest refinances. Fannie Mae’s Selling Guide treats cash-out as its own category, with cash-out pricing even in the delayed-financing exception for a recently purchased home. More scrutiny means more chances for a question to come up.
A good letter attaches the paper trail and skips the apology and the life story. One that reads like a receipt beats one that reads like a plea.
One caution: an explanation can clear a question, but it cannot rescue a file that fails a hard test. Conventional cash-out generally tops out at 80% LTV on a one-unit principal residence and 75% on two- to four-unit principal residences, second homes and investment property, per the Fannie Mae Eligibility Matrix and the program parameters Lendmire works with. One wholesale lane is the exception, reaching 89.99% LTV, as described in the section on what neither letter can change. Those limits are subject to lender guidelines and full file review. No letter waives them.
When a Letter of Intent Is the Better Fit
A letter of intent, in this setting, is a short statement of purpose. You say what you plan to do with the cash: pay off credit cards, fund a renovation, cover tuition, build a reserve. It suits a lender that asks for the use of proceeds in writing, or a borrower who wants the file to read cleanly from the start.
It is not the document the term usually names elsewhere. In business deals, a letter of intent is a preliminary, non-binding outline that comes before a contract. Job offers, graduate school applications and estate planning each borrow the phrase too. If your search results were full of those, you can ignore them. None apply to your mortgage.
In a cash-out refinance, think of the purpose letter as a lighter, optional cousin of the explanation letter. It answers a question the lender may ask even when nothing in your file looks wrong. Some borrowers send one proactively. Others wait to be asked. Either approach is reasonable, and your loan officer can tell you which the lender prefers.
Three points keep the purpose letter honest:
- It is not a promise. Because cash-out proceeds are generally unrestricted, a lender does not usually hold you to the stated use. Still, write only what you actually plan to do.
- Special-purpose loans are the exception. Some products, such as certain student-loan cash-outs, do tie the cash to a named use. Your loan officer will say if yours does.
- Keep it short. A few sentences with your name, the property address and the planned use are enough.
Consider a borrower paying off high-balance credit cards with the proceeds. A purpose letter saying so is simple and clear. Research from the CFPB found that cash-out borrowers often use proceeds to pay down credit card and auto debt. Credit scores rose sharply after the refinance, then gradually worsened. Card balances trended back toward their earlier levels but did not reach them within the following year. That is worth knowing before you decide what the cash is for.
What Neither Letter Can Change
Eligibility is decided by tests, not by wording. Here is what the underwriter checks regardless of any letter you send:
- Leverage. Conventional cash-out is generally 80% LTV on a one-unit principal residence and 75% on the other property types above. LTV, or loan-to-value, is the loan amount divided by the home’s appraised value.
- Seasoning. Seasoning is the waiting period before you can refinance. The first mortgage being paid off generally must be at least 12 months old, and a borrower must have been on title for six months. Delayed financing, inheritance and legal-award exceptions exist.
- Credit and ratios. The wholesale conventional programs start at a 620 decision score, with a total ratio ceiling of 50% on most files. For most loans, the underwriting system’s automated finding, rather than a fixed manual rule, governs the decision.
- Appraised value. Value drives how much cash is available.
One wholesale lane is the exception to those leverage limits. It reaches 89.99% LTV with no mortgage insurance, at a 680 score and a 50% ratio, on a thirty-year fixed primary residence with a conforming balance. It carries its own six months of seasoning. Texas homestead cash-outs are capped at 80% of the home’s value by the state constitution, and that lane is not written there. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.
Mortgage insurance is the other fixed item. It is required above 80% LTV on the agency path, and the no-insurance wholesale lane above is the exception. When it applies, you can request cancellation at 80% of original value, and the servicer must end it automatically at 78%. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.
A strong letter cannot waive any of this. It can only keep a clean file from stalling over a loose end.
Which One Do You Need?
Work through it in order.
1. Does anything in your file look unusual? A big deposit, a new inquiry, a late payment. If yes, expect to write an explanation.
2. Has your loan officer asked for a purpose statement? If yes, write a short purpose letter.
3. Is your file clean and no one has asked? You may need neither. Ask anyway.
4. Did someone use the phrase “letter of intent”? Ask what exactly they want. The term is loose, and the document behind it can differ from lender to lender.
Lendmire’s piece Do You Need a Letter of Explanation for a Cash-Out Refinance? walks through the trigger list in more detail. Its companion on how a letter of explanation works on a cash-out refinance covers what to put in the letter and what to attach.
Lendmire’s cash-out refinance programs page lays out the leverage and seasoning rules by occupancy, so you can see where your file sits before any letter comes into play.
Key Terms Defined
Letter of explanation (LOE): a signed note that answers one specific question the underwriter raises about your file.
Letter of intent: in a cash-out refinance, usually a short statement of what you plan to do with the cash. Elsewhere, a non-binding outline that precedes a contract.
Cash-out refinance: a new, larger mortgage that replaces the current one and pays you the difference in cash.
Seasoning: the minimum time you must hold a loan or title before a refinance is allowed.
LTV: the loan balance divided by the appraised value, shown as a percentage.
Underwriter: the person at the lender who reviews your file against program rules.
Mistakes That Make a Letter Worse
- Writing a novel. Long letters invite more questions.
- Guessing. If you are unsure of a date or amount, check the statement first.
- Skipping the proof. A claim with no document attached resolves nothing.
- Promising a use you will not follow. Say what you actually plan.
- Leaving it unsigned. An unsigned note is just an email draft.
- Treating it as a bargaining chip. The letter explains the file. It does not negotiate the program.
The Verdict
Treat these as two tools, not two competitors. The letter of explanation is the standard one. It answers a specific question, and you will write one only if your file raises one. The letter of intent, in this setting, is a lender’s optional ask about purpose. Neither is an agency requirement, and neither moves LTV, seasoning, credit floors or mortgage insurance.
If your file is clean, you may send nothing at all. If something looks odd, explain it briefly and attach proof. If the lender asks what the cash is for, answer in a few honest sentences. Then spend your real energy on the things that decide the loan: equity, credit, ratios and appraised value.
If you are weighing a cash-out refinance against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches. Program figures are subject to lender guidelines and full file review, and nothing here is a commitment to lend.
Frequently Asked Questions
Is a letter of intent required for a cash-out refinance?
No agency rule requires one. Fannie Mae, Freddie Mac, HUD and VA do not define a letter of intent for this purpose. A lender may still ask for a written statement of purpose as its own practice, so ask your loan officer what your lender wants.
Do I have to say what I will spend the cash on?
Generally no. Freddie Mac’s definition says cash-out proceeds carry no specific restrictions on use. A lender may still ask for a short purpose statement, and some special-purpose products do tie the cash to a named use. Your loan officer will tell you which applies.
Should I send a letter of explanation before anyone asks?
Only if your file has an obvious question, such as a large deposit or a recent inquiry. A short, documented note can head off a delay. If your file is clean, wait to be asked.
Can a good letter get me past a seasoning or LTV limit?
No. Seasoning and leverage are fixed program tests. Exceptions are narrow and named, such as delayed financing for a recent cash purchase. A letter explains your file. It does not change the rules.
Is a cash-out refinance the same as a HELOC?
No. A cash-out refinance replaces your first mortgage with a larger one. A HELOC or home equity loan leaves the original mortgage in place, as the CFPB explains.
For your own numbers, request a scenario review with Lendmire.
For current guidelines and terms, see Lendmire’s refinance programs page.
About Lendmire
As a mortgage broker (NMLS# 2371349), Lendmire helps homeowners and home buyers in 16 states with FHA, VA, conventional and jumbo purchase and refinance loans arranged through wholesale lenders. Lendmire is never the lender; program terms are set by the lender and the agency guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
2. Fannie Mae Selling Guide B2-1.3-03
3. Fannie Mae Eligibility Matrix
4. CFPB: cash-out refinance borrowers and credit scores
5. CFPB Office of Research: cash-out refinance mortgages and their borrowers
This article is part of Lendmire’s cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How a Cash-Out Refinance Works for Buying Before Selling · How Much Cash Comes Out of a Cash-Out Refinance on Your Home? · How Much a Cash-Out Refinance Releases for College Tuition
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
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- North Carolina Insurance Producer · License# 19053198 · Property, Casualty, Life, Health · Verify on NAIC SBS
- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Disclosures. The information presented in this article is general market commentary, not financial, legal, or tax advice. Lendmire is a mortgage brokerage (NMLS# 2371349) — not a direct lender or depository institution — and loan placement is subject to lender underwriting. Nothing in this content represents a commitment to lend. Loan terms, pricing, and program availability vary based on borrower qualifications, property characteristics, and state of subject property, and are subject to change at any time. Lendmire complies with Equal Housing Opportunity requirements. Consumer access: nmlsconsumeraccess.org.