Spending more money than you have available in your checking account is referred to as an overdraft. A bank overdraft results in extra fees, but an occasional overdraft will not affect your current mortgage. If you are trying to obtain a mortgage loan, it is important to keep sufficient funds in your bank account and avoid overdrafts. Failing to pay an overdrawn account can lead to credit and banking consequences.
TL;DR (Too Long; Didn't Read)
Overdrafts do not affect a mortgage you already have.
Impact of Overdrafts on Credit
If your account is overdrawn, pay the required fees and deposit money promptly to bring your account out of the negative. Some banks charge a daily fee if your account isn't brought to good standing within a specified number of days. If you choose not to pay the debt, the bank may send your account to collections.
A delinquent account will have a negative impact on your credit score. Your credit score must be at least 620 for a conventional loan. Factors that affect your credit include payment history, the amount you owe creditors, length your accounts have been established and the types of lines you have.
The Right of Offset
If your mortgage lender is the same bank securing your mortgage loan, you may have a banking conflict. Banks have what is known as "the right of offset," which gives the institution the ability to collect on a delinquent secured loan. If you have multiple accounts at a bank and one of your accounts is negative, the bank may transfer funds from an account with a positive balance to the overdrawn account.
For instance, if you are delinquent on your mortgage secured by the same bank you use for personal banking, the bank may withdraw the funds from your checking account to cover the payment. State laws vary on bank offsets. In some states, banks are not required to notify customers before offsetting an account.
Banking Requirement for Mortgage Applications
Lenders ask to see bank statements. Typically, lenders want to see at least three months of bank statements to prove you have enough money coming into the account to cover all your expenses. If your account has been in the negative, the lender may decide you are unable to meet your current financial obligations.
An occasional overdraft can be overlooked, provided you were able to promptly cover the draft and fees. Banks have different policies when it comes to excessive overdrafts. Some charge an excessive overdraft fee, while others choose to close the account after numerous overdrafts. If your account is involuntarily closed, opening another account is often challenging.
Avoiding Overdrafts and Their Consequences
Overdrafts are designed to be a service to you. Instead of declining your transactions, the bank covers the purchase along with charging you a fee. If you want to avoid overdraft fees, contact your bank to opt out of overdraft coverage. You can also inquire about overdraft protection, which allows you to link a secondary account, such as a savings, to your checking account. If you overspend, money is automatically transferred into the primary account to cover your purchase.
Jeannine Mancini, a Florida native, has been writing business and personal finance articles since 2003. Her articles have been published in the Florida Today and Orlando Sentinel. She earned a Bachelor of Science in Interdisciplinary Studies from the University of Central Florida.