When it comes to buying or refinancing a home, most realize that the credit report is key. Paying debts on-time is key and that may get a mortgage preapproval. Although when bank statements are provided later, there could be a big issue lurking in the there. One area mortgage underwriters look for is when bank accounts go negative. This is called an overdraft or nonsufficient funds (NSF). An overdraft is when the account goes negative, but the debit or check is covered. Conversely, an NSF is not covered and an example is a bounced check. Either way, negative balances and one other banking transaction can hurt the chance of a mortgage loan approval.
What Do Mortgage Lenders Look for in a Bank Statement?
On bank statements, lenders are looking for more than the bank account balance. Sure, having sufficient funds in bank accounts to cover the down payment and reserves are very important. But in the background, there are key areas that a mortgage underwriter is trained to find.
10 Things Underwriters Look for on Bank Statements
- Undisclosed additional debt – IRS, child support, alimony, new debts, and more
- Additional income – important for programs that have household income limits
- Negative balances
- Current period and year to date overdraft and NSF fees
- Additional people on bank account
- On-time payment history
- Deposits – general deposit sources may need to be verified
- Transfers in and out of bank account
How to Avoid Overdraft Issues
During the normal day to day life, it is not a big deal to deposit some cash, transfer funds to and from accounts, or let overdraft protection take over. However, during the mortgage process, these simple activities may deny a loan or at least cause more documentation.
First, there is not much that can be done about overdraft or NSF transactions earlier in the year. Although with some preparation and using this newfound knowledge, buyers can avoid delays and denials.
- Do not go negative – No matter what!
- Stay away from overdraft protection
- Try not to transfer funds back and forth unless the loan officer is consulted
- Avoid large cash deposits
- Do not close bank accounts
- Delay a gift deposit until speaking with the loan officer
- Keep as much in bank accounts as possible while keeping bills paid on time
- When there is an overdraft or NSF, write a strong explanation letter
Now, you know how to avoid one of the most popular, yet least known issues in the mortgage process. A bank account with the following will improve chances of loan approval
- Stable balances
- Verifiable deposits
- No NSF or overdrafts
- Reserve funds – money left over after down payment is a compensating factor