FHA Underwriting Process — Overdraft and NSF

Expending more than what you have in your checking account can hurt the chance of your FHA loan approval. When your account goes negative, it can turn to an overdraft (OD) or non-sufficient fund (NSF) one.

These two are interchangeably used by many, but they’re technically different. One main difference is that a debt cannot be paid with NSF as it is with an overdraft. Moreover, if you’re planning to buy or refinance a home and you need to obtain a mortgage loan, there’s a need for you to avoid OD and NSF.

Whether your account is in good or bad standing, this can be usually reviewed during the second phase or middle stage of any FHA loan application—the underwriting process. What documents will underwriters check on your bank statements? How overdraft and NSF affect your FHA loan application?

What FHA Underwriters Look for on Bank Statements

Lenders may require applicants to hand in more bank statements. This is to review an applicant’s patterns of credit activities. This usually depends on different lenders. Some will apply their standards, while others don’t.

Underwriters have to ensure the loan is insurable. Aside from overdrafts and non-sufficient funds, here’s the list of the typical checkpoints and documents that mortgage lenders and FHA underwriters will look for and review:

• Additional income
• Bank Transfers
• Deposits
• Joint ownership of bank accounts
• Negative balances
• On-time payment history
• Previous and current overdraft and NSF fees
• Undisclosed additional debt (e.g., Alimony, Child Support, IRS, etc.)

In regards to the age-of-documents topic, the HUD (Housing and Urban Development) rule no. 4000.1 states that all documents employed in the underwriting and origination of a mortgage should be no older than 120 days at the disbursement date.

On the other hand, tax returns, divorce decrees, and other files whose validity for underwriting purposes is not influenced by time can be 120 days old or older at the disbursement date. While a requested document should be no older than 120 days, its information can be older than four months.

For clarity’s sake, the considered “issue date” of these files should be the day after the effective date of a specific document. If the age of a certain file exceeds this said limit, a lender will not utilize that document or will not acquire “updated written verification of the documentation.”

Impact of Overdrafts on FHA Loan Application

Deposit the required money and pay fees as soon as possible if your account is overdrawn. Otherwise, you’ll just be leaving your account in bad standing. An overdraft fee average cost is $35 or so, but it usually depends on the bank you had a transaction with.

Many banks charge a daily fee if your account is left as negative within a specified number of days. If you weren’t able to pay your debt, the financial institution could hand in your account to collections.

If you want to be an eligible applicant for an FHA loan, you need to have at least a credit score of 620. Unfortunately, overdrafts will hurt your credit rating. When overdraft or NSF doesn’t appear on an applicant’s credit report, FHA regulations do address this case. The resolutions are on a case-to-case basis, though. It’s best to contact a professional for this matter.

Apart from a delinquent account, your payment history, length your accounts have been established, the total sum of money you owe creditors, and the lines you own can affect your credit score, and eventually, your FHA application.

Before applying for an FHA loan, all applicants are typically recommended to apply for any other home loans with a minimum of 12 months of timely payments, alongside other credit activities behind them.

An FHA loan applicant has to meet two sets of criteria, one from the lender’s and another from the government’s (that of Housing and Urban Development). Take note that a lender’s standard may go beyond any FHA loan minimum requirements, as well.

How to Prevent Overdraft/NSF Issues

Truth be told, there’s nothing much you can do for overdraft or NSF transactions earlier in the year. But some actions can be avoided to prevent delays or denials for your FHA loan application. Here are things that you should steer clear from or shouldn’t do at all. Avoid:

• Opting for overdraft protection
• Closing your bank accounts
• Going negative
• Transferring funds back and forth consecutively
• Depositing large cash deposits

It’s also recommended to delay gift deposits. They require documentation and even legal documents, ensuring that this gift deposit is indeed a present given to you by someone who doesn’t expect to be paid back. It takes some time and may just hold up the underwriting process of your FHA loans.


A credit report plays a crucial role in the approval of any mortgage application, especially that of the Federal Housing Administration or FHA loans. It has always been the on-time payments that made a mortgage pre-approved easily. Also, stable balances, verifiable deposits, and reserve funds can improve the chances of loan approval.

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