Overdrafts on Your Bank Statements Are Like Pimples on Prom Night

Mortgage and Lending with First Heritage Mortgage NMLS #: 938761

You’ve decided you are ready to buy a house, you have contacted a Realtor to get the online search process started, and just one thing stands in your way from beginning the physical house hunt: the mortgage pre-approval.

You have probably been introduced to a lender by your Realtor, you have filled out the online application, and now the lender wants you to hand over documentation to verify your income and assets, including your bank statements, before he or she will issue a pre-approval letter.

You immediately think back to that time last month when you wrote a check and it was cashed before your pay check had time to clear.  You didn’t have enough in your account at the time to cover the check and you were hit with the overdraft fee.  It now taints the pages of your bank statements like a large pimple on your otherwise blemish-free face on prom night.  Could the timing be any worse?

Or, maybe you are already under contract on your home, your loan has just come out of underwriting, and the underwriter spotted an overdraft fee on your bank statements that your loan officer missed and wants an explanation.

Solving Your Overdraft Dilemma

I have good news for you.  As long as you were able to promptly cover the overdraft and this is a pretty rare occurrence for you, you should still be able to get a mortgage loan.  (Of course, the other parts of your mortgage application will have to be up to par.)  Just like teenagers have Clearasil to combat the occasional life-ruining pimple, we mortgage lenders have our own solution to a bank statement blemish:  the LOX (letter of explanation).

If I was the loan officer on this pre-approval, I would go ahead and have the borrower craft a letter of explanation to document the overdraft.  The underwriter will ask for one once he/she reviews the loan file, so I prefer to get these documents upfront.  If you’ve been asked to write a letter of explanation for a bank overdraft, I’ve written a post to explain the format for the letter with a sample letter for you.  It is currently the most popular post on my site, so I can tell there are many people out there running into this issue.

Tips on Your Bank Statements and Mortgage Underwriting

Once you are in underwriting, your bank statements may need to be updated to show the earnest money deposit (EMD) clearing your account.  It’s important that you try to keep your bank statements as clean as possible until you close on the loan–avoid overdrafts (non-sufficient funds fees), depositing cash, and transferring money between bank accounts.

I have guided many borrowers through this situation, and I am here and happy to help if you are in need of assistance with your mortgage pre-approval in Virginia.  Feel free to contact more for more information.  If you are looking to purchase a home in a state other than Virginia, I have access to other lenders I know, like, and trust through my company First Home Mortgage and my extensive lender referral network outside of First Home Mortgage.

Check out my other Homebuyer Tips for other helpful information on the mortgage loan and home purchase process.

Originally posted at Loan Officer Lately.

Comments (21)

Suzanne Otto
Six Twenty Designs - Lansdale, PA
Your Montgomery County PA home stager

Good to know as long as there is an explanation and a quick recovery of funds, potential home owners should be in the clear.

Sep 04, 2014 10:22 PM
Dorie Dillard Austin TX
Coldwell Banker Realty ~ 512.750.6899 - Austin, TX
NW Austin ~ Canyon Creek and Spicewood/Balcones

Good morning Whitney,

Good to know there is a way around that on blemish..a letter of explanation is a good way to tell the story! Thanks for your explanation..good analogy!

Sep 04, 2014 10:47 PM
Robert Vegas Bob Swetz
Las Vegas, NV

Hello Whitney ... love your post and featured to the group!


Sep 05, 2014 08:36 AM
Larry Johnston
Broker, Friends & Neighbors Real Estate and Elkhart County Subdivisions, LLC - Elkhart, IN
Broker,Friends & Neighbors Real Estate, Elkhart,IN

Hi Whitney,  Great advice for new home buyers and even those that haven't bought a home in a while.

Sep 05, 2014 11:47 AM
Lisa Von Domek
Lisa Von Domek Team - Dallas, TX
....Experience Isn't Expensive.... It's Priceless!

Hello Whitney,

Great post - little "blips" on your credit can be cured...but it is better to avoid them!

Sep 05, 2014 01:35 PM
Roy Kelley
Retired - Gaithersburg, MD

This is good information for prospective borrowers. You should remove the members only  restriction.

Sep 06, 2014 01:00 AM
Whitney Watson
First Heritage Mortgage - Henrico, VA

Roy Kelley , thanks for letting me know!  Whenever I schedule a post for an earlier date as of late, it publishes as "Members Only" even if I haven't selected that audience.  Is there something I'm doing wrong?  It didn't do that before...

Sep 06, 2014 01:42 AM
Roy Kelley
Retired - Gaithersburg, MD

I have experienced the same problem. My public blogs have been designated for members only when I schedule them for a future date. I hope you will report this issue to tech support at ActiveRain.

Sep 06, 2014 01:46 AM
Myrl Jeffcoat
Sacramento, CA
Greater Sacramento Realtor - Retired

Without a doubt, that is one of the more creative titles for a blog post.  Good job!

Sep 06, 2014 09:38 PM
Fred Griffin Florida Real Estate
Fred Griffin Real Estate - Tallahassee, FL
Licensed Florida Real Estate Broker


       I haven't written a check in forever.   We pay cash, or use debit cards.   But I certainly remember some of those "zits" on my checking statement back in the day!

Sep 08, 2014 12:11 AM
Robert Bob Gilbert
Berkshire Hathaway HomeServices Anderson Properties - Katy, TX
Your Katy TX ( West of Houston) Real Estate Expert

Whitney, Thanks for the tips and overdrafts should be as you said avoided. Like Fred I try not to write any checks but sometimes it is required. 

Sep 08, 2014 06:30 AM
Shannon Milligan, Richmond VA Real Estate Agent/Associate Broker
RVA Home Team - Richmond, VA
RVA Home Team - Winning with Integrity.

As usual, you provide great information to those looking to obtain a loan in Virginia. There are often solutions to every problem and Virginia Mortgage Lender Whitney Watson usually has the answer!

Sep 08, 2014 11:17 PM
Debbie Malone
Londeree's Real Estate & Property Management - Lynchburg, VA
From Lynchburg To The Lake (434) 546-0369

Hi Whitney, great tips on clearing up those blemishes with your bank statements! Congrats on the feature!

Sep 10, 2014 12:55 PM
Nick T Pappas
Assoc. Broker ABR, CRS, SFR, e-Pro, @Homes Realty Group, Broker/Providence Property Mgmnt, LLC Huntsville AL - Huntsville, AL
Madison & Huntsville Alabama Real Estate Resource

Whitney, great tip for buyers...especially helping with the explanation letter. Buyers may view it as an annoyance or inconvenience...one more doc needed from the lender...but that lender is loaning them a large chunk of change and they're just protecting their investment.

Sep 11, 2014 09:15 AM
Rebecca Gaujot, Realtor®
Lewisburg, WV
Lewisburg WV, the go to agent for all real estate

Hi Whitney, great analogy, and a great title for this post. Deserving of a feature!

Sep 18, 2014 04:51 AM
Debbie Reynolds, C21 Platinum Properties
Platinum Properties- (931)771-9070 - Clarksville, TN
The Dedicated Clarksville TN Realtor-(931)320-6730

I have had some buyers that didn't realize this could affect them getting a loan. Lenders are looking at the whole picture. 

Sep 24, 2014 02:59 PM
Mike Rankin
ClearPath Mortgage Solutions, Inc. NMLS #1394615 - Albany, NY
Mortgage Consultant

Whitney - LOVE the creative title! Caught my eye for sure, and it is 100% the truth. I talk about this issue a lot during my pre-approvals. 

Sep 29, 2014 11:15 PM
Sussie Sutton
David Tracy Real Estate - Houston, TX
David Tracy Real Estate for Buyers & Sellers

Great post it was a hard read for me I guess I need new glasses. 

Oct 17, 2014 03:12 PM
Sharon Paxson
Sharon Paxson, Realtor® EQTY Forbes Global Properties - Newport Beach, CA
Newport Beach Real Estate

Hi Whitney - good post and information about overdrafts. I am sure there are many who do not realize that it could affect their ability to obtain a home loan.

Oct 24, 2014 12:47 AM
Keller Williams Select Realtors-Buy a home in Washington DC. Sell a home in Washington DC - Bowie, MD
I don't make promises.I deliver results.SOLD HOMES

Whitney this blog should've been featured. Going to go and check out that popular blog of yours. Thanks for sharing. Have a great weekend.

Nov 21, 2014 10:26 AM