Mortgage Application Likely Denied Due to Bank Overdrafts

I recently applied for a mortgage loan and was worried when they asked for two months of bank statements. My account hasn’t been stable over the past year, mostly due to my own mistakes. Now I realize this might not be the best time to buy a house until I can show more consistent financial stability.

I got an email from the loan officer saying that even though my income and credit are okay, the overdrafts in my account over the past year would likely be a big issue for the underwriter, almost certainly leading to a denial.

What steps can I take to avoid this situation when I’m ready to apply again? This experience has been really embarrassing, but it’s also been a great learning opportunity for me.

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You only need to show statements that prove you have enough money for the down payment and closing costs. If your income and credit are good, just provide proof that you’ve had enough money for at least 2 months to cover the closing.

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Some bank statements will indicate the number of overdrafts in the past 12 months.

One option you might consider is opening an account at a different bank. Transfer all your funds, or at least the amount intended for the home purchase, to the new account and wait two months.

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I recommend transferring the funds intended for the transaction into a savings account, preferably a high-yield one, and leaving them untouched for at least 60 days. Continue having your paycheck deposited into your checking account, but use it only for daily expenses; money comes in for bills and any surplus is transferred to savings.

When you’re ready to apply again, submit only the statements for your savings account, which will have a clean transaction history. Avoid including your checking account statements if it’s still experiencing occasional overdrafts.

If you’re receiving down payment assistance or seller concessions covering your closing costs, you may not need to provide a bank account for most FHA loans or for conventional loans under a certain debt-to-income ratio. This could allow you to apply with a different lender right away.

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Did they officially deny your application and send you a denial letter, or did the loan officer merely suggest that it might be denied? If you received a denial letter, what reasons were cited for the denial?

Typically, lenders request two months’ worth of bank statements to verify that you have the necessary assets for the down payment and closing costs. If your loan officer asked for 12 months of statements, it might indicate that they were not very competent.

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I haven’t received a formal letter of denial yet. However, the loan officer indicated that the application is likely to be denied. My bank statements currently show overdraft fees.

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Think of it as a blessing in disguise. If you’re struggling to manage your account and avoid overdrafts, it’s a sign you might not be ready for a mortgage just yet. Start by creating a budget and sticking to it. Focus on saving up for a larger down payment or more cash to close, and ensure your account stays in good standing for at least six months. Consider taking a financial literacy course, even if it’s just a few YouTube videos, and then give it another try.

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Are you using your own funds for the down payment or closing costs? If so, you’ll generally need to document those funds, and bank statements are the easiest way to do that.

You might also consider using a Verification of Deposit (VOD) as an alternative. This form provides information about your bank account and must be completed by your bank. Check with your lender (or another lender) to see if they will accept a VOD instead of bank statements, especially if your statements show overdrafts. The VOD includes a section about creditworthiness, and while it might not explicitly address overdrafts, it’s worth exploring as an option.

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Don’t spend more than you have. It’s that easy.

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If I wanted tips on avoiding overdrafts, I would have posted in another forum.

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That doesn’t address my question. I’ve already recognized the irresponsibility and have taken steps to prevent it from happening again. Unfortunately, my bank statements will still be affected until they improve. Thanks anyway.

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Yes, it does. You inquired about ways to prevent encountering the same issue again. The solution was to avoid spending more than you have.