First of all, there is no need to panic. Bank account overdrafts rarely result in a mortgage application being declined for otherwise qualified applicants. If you have a better than average credit score, a good job with a steady income and you meet the lender's other qualification requirements, then you should be approved for your mortgage.
According to mortgage lender guidelines, if your bank account statements "demonstrate overdraft activity, that information suggests a weakness in the borrower’s ability to meet financial obligations. The lender must assess the significance of this information relative to the borrower’s overall credit risk."
In short, the lender is required to look into the overdrafts, understand why they happened and evaluate them within the context of your overall mortgage application. In other words, if the rest of your application such as your credit score, debt-to-income ratio, employment history and down payment are in good shape, then overdrafts should not prevent you from qualifying.
On the other hand, if your application has other challenges such as a low credit score; limited credit history; derogatory credit events including a bankruptcy, default or foreclosure; a high debt-to-income ratio or limited employment history and you are on the margin in terms of qualifying for the mortgage, then the overdrafts may be more of an issue.
Another factor to keep in mind is the frequency of the overdrafts and how recently they occurred. If you experienced two or fewer overdrafts over the prior year, then this should not cause a significant issue. If you experienced repeated overdrafts -- such as three or more over the past twelve months -- this may be a sign that you have challenges managing your finances and debts, which may cause the lender to reconsider your application.
We should also highlight that for most applicants, lenders only review your bank statements for the most recent two months. So if the overdrafts occurred more than two months ago, chances are the lender may not learn about them.
If you are concerned about the potential impact of overdrafts, the best approach is to be prepared in case the lender raises the issue. Before you apply for the mortgage, I recommend that you draft a letter of explanation that outlines why the overdrafts occurred and what you did to address them.
The letter should be factual and to the point and summarize the steps you took to correct the issue. If multiple overdrafts resulted from the same recurring issue, you should note how you resolved the issue so it does not occur again in the future. Keep in mind that the best letters of explanation for a mortgage are usually concise.
I would only provide the letter if the lender asks about the overdrafts when they review your mortgage application. Because you have prepared the letter in advance, you can quickly address the issue without needlessly bringing it to the lenders attention.
The final point to keep in mind is that an overdraft is different than a non-sufficient funds (NSF) notice that appears on your bank account when you do not have enough funds to cover a payment made from the account. The good news about an overdraft as compared to an NSF is that the payment is typically made so it should not affect your credit, which is another reason why overdrafts are usually a non-factor for a mortgage.
The table below shows mortgage terms for leading lenders in your area. We recommend that you contact multiple lenders to confirm their qualification guidelines and understand how overdrafts may impact your ability to get approved for the loan. Comparing proposals from several lenders is also the best way to save money on your mortgage.
"B3-5.4-03, Documentation and Assessment of a Nontraditional Credit History." Selling Guide: Fannie Mae Single Family. Fannie Mae, August 30 2016. Web.« Return to Q&A Home About the author