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 zit 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 me 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.