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, have a good job with a steady income and are making a down payment of at least 20%, 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 solid, then overdrafts should not prevent you from qualifying for a mortgage.
On the other hand, if your application has other challenges such as a low credit score; derogatory credit events including a bankruptcy, default or foreclosure; a high debt-to-income ratio or limited job history and you are on the margin in terms of qualifying for the mortgage, then the overdrafts may be a disqualifying consideration.
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 and may cause the lender to reconsider your application.
One of the best ways to address bank overdrafts is to be prepared. 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 of explanation 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 loan application. Because you have prepared the letter in advance, you can quickly address the issue without needlessly raising it with the lender.
We always recommend that you contact multiple lenders to understand how they would handle your unique situation. It can be helpful to have conversations with lenders about the potential impact of the overdrafts before you select a lender and apply for the mortgage. You can contact lenders in your area in the table below. We advise you to contact at least five lenders as as qualification guidelines vary. Plus, shopping lenders is the best way to save money on your mortgage.