If a payment hits your bank account and you do not have enough money to make the payment a notice of non-sufficient funds, or NSF, appears on your account. The most common example of an NSF is a bounced check but other examples include an automatic payment for a bill or loan that is rejected because you do not have the funds in your account to pay it.
An NSF is different than an overdraft because the payment is not made. With an overdraft, the payment is usually made either with funds from another account or as a temporary loan from your bank, although you are usually required to pay an overdraft fee.
In most cases an NSF does not directly prevent you from getting approved for a mortgage but it is important to understand how the timing and number of NSFs impact your application. Additionally, NSFs can affect your credit score which can impact your ability to qualify for a mortgage.
The first point to keep in mind is the timing of when the NSF occurred. When you apply for a mortgage you are usually required to provide bank statements for the prior two months to verify the source of funds for your down payment and your assets in general. So if the NSF happened more than two months ago, chances are the lender may not learn they occurred because they do not appear on your bank statements.
If the NSF happened within the past two months then the question is how many times did it occur and what does to rest of your mortgage application look like? If you only have one NSF, that should not be a disqualifying factor.
If your bank statements show multiple NSFs then you may be required to provide a letter of explanation that addresses the issue and the steps you are taking to prevent it from happening again. If you have other issues with your application such as a low credit score or derogatory credit events such as missed payments or delinquent accounts, the cumulative effect of these issues along with the NSFs can make it challenging to qualify for a mortgage.
Additionally, if the lender uses standard underwriting to review your application, the NSFs are less of an issue. If the lender uses manual underwriting, which is required if you need an exception to a guideline to qualify, the NSFs can create more of a challenge. Make sure to consult your lender before you submit your application to understand the underwriting process that applies to you.
The final point to keep in mind is that even if the NSF did not happen within the past two months and does not appear on the account statements that the lender reviews, it can still affect your credit score. For example, if the NSF was related to a credit card, car loan or other debt, the missed or late payment for that account can cause your credit score to drop.
Depending on your loan program, if you have a lower credit score you may be required to pay a higher mortgage rate. A higher mortgage rate increases your monthly payment and may reduce the loan you can afford. Additionally, if your credit score is too low, you may be ineligible for certain mortgage programs.
These are examples of how an NSF can indirectly affect your mortgage application even though the lender may not be aware that they exist.
In closing, if you experienced an NSF one time and the rest of your application is in good shape then it should not affect your ability to get approved for a mortgage. If you have challenges with your application and experienced multiple NSFs that hurt your credit score, then you may want to wait until your score improves and the NSFs no longer appear on your bank account statements before you apply.
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"B3-5.4-03, Documentation and Assessment of a Nontraditional Credit History." Selling Guide: Fannie Mae Single Family. Fannie Mae, August 30 2016. Web.