Ask Our Broker With Peter G. Miller
By Peter G. Miller
CTW Features
Question: We are about to apply for a mortgage, but have several bank overdrafts on our record. How much will that hurt us?
Answer: Bank overdrafts fall into a strange gray area when it comes to mortgage approvals. For most borrowers they’re unlikely to be an issue, but for a small percentage overdrafts can demolish a loan application.
According to the Consumer Financial Protection Bureau (CFPB), most overdraft fees are paid by a small fraction of bank customers and eight percent of customers incur nearly 75 percent of all overdraft fees.
Fannie Mae’s underwriting guidelines state that if bank account statements demonstrate overdraft activity, that information suggests a weakness in the borrower’s ability to meet financial obligations. The lender must assess the significance of this information relative to the borrower’s overall credit risk.
In other words, the loan underwriter will look at your overall application in an effort to understand your finances and credit.
An iffy borrower with several overdrafts might be declined while an iffy borrower with few overdrafts or no overdrafts might get the benefit of the doubt. The application of a strong borrower, someone with a high credit score, might sail through the application process even with a few overdrafts because they suggest little credit weakness in the context of the borrower’s overall financial picture. There’s no hard and fast benchmark under the Fannie Mae standard.
The real question is how to make bank overdrafts a non-factor. One answer is to avoid overdrafts altogether, but in a world where deposits and withdrawals don’t always match there still remains the possibility of a negative balance. The best solution to the problem is to work with your bank or credit union to have a checking account with overdraft protection.
“Having a bank account will help you establish and manage good credit,” said Freddie Mac. “For example, if you opt to receive overdraft protection on your account – a feature that automatically advances funds into your account to cover items that would cause a check to bounce – you’ll receive a positive tradeline for your credit report.
“As part of credit report terminology, a tradeline is any credit account you might have, such as a loan, credit card or mortgage,” Mac said.
There is another reason to get overdraft protection: according to the CFPB, the typical payday loan is just less than $400, but the cost can be huge.
“A fee of $15 per $100 is quite common for a storefront payday loan, and would yield an APR of 391 percent on a typical 14-day loan,” as stated by the CFPB.
The bottom line: Getting overdraft protection can help with mortgage applications, eliminate overdraft fees, and help borrowers avoid the dreaded costs of payday loans.
© CTW Features
Peter G. Miller is author of “The Common-Sense Mortgage,” (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.
