Did you know there’s a concept known as “loan seasoning”?
And no, it doesn’t have to do with anything cooking-related.
In the context of a down payment, loan seasoning refers to the length of time that the funds used to close have been in your account.
The point is that a borrower should have “skin in the game,” meaning they plan to use their own, not borrowed, funds to make a down payment.
In this blog, we’ll talk about the seasoning requirements for a down payment.
Let’s get started.
1. What is a seasoned loan?
A seasoned loan is a loan that has been out for at least 12 months in which the borrower has a good payment history.
Fannie Mae, FHA and other government agencies often require that a loan be seasoned before a borrower can refinance it or sell the property without additional scrutiny from the buyer’s lender.
2. Why is a seasoning period?
Before they’ll approve a loan, mortgage lenders often have seasoning requirements.
For example, these requirements may include seasoned funds, which are dollars that have remained in your bank account and have been accessible to you for a certain length of time.
On the other hand, they may require a minimum seasoning period before you can buy another home.
This “seasoning period” typically follows a bankruptcy, a foreclosure, a short sale, or when you refinance your mortgage.
There are three primary reasons why lenders require seasoning.
The first is to ensure that borrowers didn’t secretly borrow payment funds that have to be paid back as this will impact debt ratios.
The second is to make sure that borrowers have their own “skin in the game” with their own funds going toward the down payment.
The third is that it verifies that the borrowers have the ability to save.
Some real estate attorneys have compared loan seasoning to wine aging to simplify the concept.
Aged wine equals better wine.
As such, the longer you make payments on a loan or save money for a down payment, the better you are qualified as a borrower.
3. What funds don’t require loan seasoning?
If you’re worried about the loan seasoning process, you’ll be excited to learn that some funds don’t have any seasoning issues.
These are funds that lenders can automatically verify beyond a reasonable double.
They know they aren’t a loan.
Here are funds you’re in the clear for:
Payroll deductions: If your employer automatically deducts a portion of your income to put into your savings account, then your lender will be able to verify this easily with your paystubs.
Don’t worry about loan seasoning when it comes to this!
Funds from your 401K: If you’re eligible to borrow money from your 401K, you won’t have to wait 60 days to use them to purchase a home.
That said, you should wait until you are ready to buy the house as the law states you only have 120 days to use the funds.
Gift funds: Sometimes…we won’t say you’re automatically okay on this one, but money from a friend or relative to purchase a home may not require seasoning.
Be prepared to provide a paper trail to prove where the funds originated and to verify that the funds aren’t a loan.
That said, you won’t have to wait 60 days to use them, so that’s a bonus!
Additionally, there are some sources of funds that will be considered “seasoned” even if the deposits are very recent.
This is good to keep in mind as you prepare to buy a home.
Income tax refunds (with proper paperwork)
Security deposit refunds (with proper paperwork)
Earned salary income
Bonus income (provides for flexibility)
Contract/invoice income for self-employed borrowers
Home equity line of credit funds (buyers can use equity line funds at any time)
Proceeds from the sale of stocks or securities (with proper paperwork)
Proceeds from the sale of an automobile or other vehicles (with proper paperwork)
Proceeds from the sale of real estate (with proper paperwork)
Valid gift funds (with a signed gift letter)
4. How do you prove the origination of funds for loan seasoning?
Part of the loan seasoning process is understanding where your funds originate from.
If your lender isn’t able to determine beyond a reasonable doubt where your funds originate from, then they will ask you for proof of funds.
They want to know how you got the money you have.
Often, money originates from the following origins.
Sale of an asset
Tax refund
Bonus from work
Commission from work
Gift from a relative or friend
That said, you aren’t able to just state that you received money from a tax refund or a gift.
You have to prove it.
The best way to do this is by using paperwork.
Lenders like to see paper trails because it gives them a way to track funds and allows them to know beyond a reasonable doubt that the money didn’t come from a loan.
Say for example that you recently sold your car, and you had a large deposit from that transaction.
You should have a paper trail that demonstrates this.
This paper trail would include:
The bill of sale
A copy of the cashier’s check provided
A copy of the deposit ticket from when you deposited the funds
The lender will verify the amounts shown and ensure that they match exactly on each of the documents to ensure that they are legitimate.
They will go through this process on any other funds to ensure you are being truthful.
Another example is a tax refund.
For a tax refund, you should have your tax returns plus a check stub from the check written to you or a copy of your bank statement on the date of the funds’ transfer.
This process should be fairly straightforward for you (as the borrower/homebuyer) as long as you keep your paperwork straight.
The one spot that may require extra care is if you receive gift funds.
For one, you need a reason for the gift funds.
For instance, did you recently get married or have a large celebration?
You can prove that this event occurred by showing copies of the checks provided with the dates corresponding to the event date.
5. How are seasoned funds and cash to close evaluated for mortgage guidelines?
In many areas of the world, cash is king.
If you have the cash for it, it’s yours.
However, when it comes to qualifying for a loan, this isn’t necessarily the case.
You can’t qualify with undocumented funds.
For a mortgage loan, seasoned funds for closing must be documented by a loan officer and mortgage processor in the earlier stages of the mortgage process.
Here are a couple of scenarios of what is acceptable and what is not acceptable.
ACCEPTABLE:
The borrower receives a $1,000 direct deposit every other week from his employer
These are considered verified funds and can be used for cash to close and seasoned funds for closing
Note: If the borrower deposits cash from his side job, these funds cannot be used for cash to close and seasoned funds for closing
NOT ACCEPTABLE:
Cash in the mortgage business cannot be used as verified funds
Any irregular deposits that are over $100 needs to be explained and the source of the deposit needs to be provided to the mortgage underwriter
So, for instance:
The borrower receives an irregular deposit of $2,000
The underwriter will need to know where that money came from
If it came from an income tax refund, then they will require documentation from the IRS and a deposit slip
Note: A letter of explanation needs to be provided for that $2,000 deposit to be used for cash to close and seasoned funds for closing
6. How long do funds need to be sourced in loan seasoning?
Borrowers sometimes run into an issue when their deposits aren’t able to be sourced.
If you’re experiencing this issue, note the below:
Borrowers who have substantial cash deposits that cannot be sourced (and thus cannot use this money as cash to close or seasoned funds) can wait 60 days from the date of their last unsourced deposit.
In this scenario, underwriters will not question it.
Lenders only require 60 days of bank statements and only the transactions from the 60 days prior to the closing are scrutinized.
Any transactions or deposits prior to 60 days are not questioned and are automatically considered verified sourced funds.
They can be used for cash to close and seasoned funds for closing.
This is ideal for individuals who do not trust banks and instead use a safe deposit box at a local bank or have cash on hand in their homes.
Remember, cash cannot be used as a verified source of funds
7. What are considered “large deposits”?
Lenders consider large deposits as those that are greater or equal to 10% of the monthly gross household income of the borrower.
Large deposits must be sourced so they can be used for cash to close and seasoned funds for closing.
So, those who plan on buying a home in the near future should deposit any and all unsourced funds and cash as soon as possible.
This will allow those funds to season in the bank account for 60+ days.
8. What about gift funds? How do they impact cash to close and seasoned funds for closing?
Did you know gift funds can be used for cash to close and seasoned funds for closing?
If you plan to use significant money gifted from a family member or another party, here’s what you need to know.
The donor must sign a gift letter that states that the funds gifted to the homebuyer are a gift (not a loan) and that the funds will not be paid back to the donor
The homebuyer must make a copy of the check received by the donor and provide copies of the deposit slip as well as an updated bank statement after the deposit of the check from the donor of the gift funds
The donor needs to provide 30 days of bank statements showing that the gift funds have been seasoned for at least 30 days
The donor needs to show gifted funds being withdrawn from their account and deposited into the homebuyer’s bank account
Disclaimer: Gift funds are not reviewed favorably by lenders or the Automated Underwriting Systems.
9. If you have miscellaneous cash, what’s the right way to deposit it into the bank to purchase a home?
If you’re working through the process of depositing large portions of cash in order to purchase a home, then loan seasoning may be a very confusing and challenging process for you.
Fortunately, the steps to get that money “seasoned” aren’t complicated.
Anyone can do them!
Go deposit those funds in a bank.
Wait 60 days for the money to become qualified assets.
Once those 60 days have passed, you can use that money toward a down payment and closing costs for your home purchase.
At this point, it will be considered “seasoned.”
Because lenders only want to see 60 days of bank statements, prior deposits won’t matter.
If you have irregular/large deposits within 60 days of your down payment or closing cost, remember that those will need to be sourced.
By depositing 60 days before closing and waiting for the funds to self-source, you won’t have anything to worry about.
10. What is the seasoning requirement for a cash-out refinance?
For a cash-out refinance, the property must have been purchased or acquired by the borrower at least six months prior to the disbursement date of the new mortgage unless the following is true:
The lender documents show that the borrower acquired the property through an inheritance or was legally awarded the property (divorce, separation, or dissolution of a domestic partnership)
The delayed financing requirements are met
The property was owned prior to closing by a limited liability corporation (LLC) that is majority-owned or controlled by the borrower(s)
The time it was held by the LLC may be counted toward meeting the borrower’s six-month ownership requirement
The property was owned prior to closing by an inter vivos revocable trust
The time held by the trust may be counted toward meeting the borrower’s six-month ownership requirement if the borrower is the primary beneficiary of the trust
Final thoughts
Understanding how loan seasoning works is vital if you want to obtain a mortgage for your home in the near future.
Additional Resources
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Disclaimer: we are not lawyers, accountants or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.
Prior to starting Gokce Capital, Erika received a Bachelor of Architecture from the University of Southern California and a graduate degree in Urban Policy from Columbia University. She worked as both an architectural designer and engineer in New York before joining the New York City Department of Housing Preservation and Development.
Erika currently lives in the New York Metropolitan area with her spouse, daughter and cat. She is originally from Chicago and still considers herself a midwesterner at heart.
Erika also loves to read, write and travel (fun fact, she has visited all 50 states and more than 30 countries!). Her new book, Land Investing Mistakes: 11 True Stories You Need To Know Before Buying Land, is now available on Amazon.