Key takeaways
- Seasoning, for mortgage-related purposes, refers to the amount of time you’ve had funds in your bank account — specifically, the money to cover the down payment and closing costs.
- For mortgages, money becomes “seasoned” after it’s been in an established account from 60 to 90 days.
- Seasoning requirements can also apply to getting a loan after bankruptcy or foreclosure, and to mortgage refinances.
What is mortgage seasoning?
“Seasoning” in regard to a mortgage can mean a few different things. Often, it refers to the amount of time lenders require funds to have been in your bank account before you use them to cover your down payment, closing costs and other upfront expenses.
If you use unseasoned funds for these purposes, you’ll have to account for them. For instance, if you receive a gift from a relative, you’ll typically need to submit a gift letter to your lender.
Mortgage seasoning can also refer to:
- The amount of time you’ve had your current mortgage. This becomes a factor if you’re trying to refinance soon after taking out a loan.
- The amount of time you must wait after an adverse credit event, such as a bankruptcy or foreclosure, before applying for a mortgage.
Why do lenders require seasoning?
In the context of down payment funds or refinances, lenders use mortgage seasoning for a few reasons. These include:
- Establishing the creditworthiness and financial stability of prospective borrowers
- Avoiding borrowers who may be attempting to engage in mortgage fraud or may have obtained the money for a down payment through illegal means
The longer you spend saving money for a down payment, the logic goes, the more likely that you earned the money yourself through legitimate means — and that you can take on the responsibility of a mortgage payment. And the longer you make payments on a loan, the better qualified you are, from a lender’s perspective, to take on a refinance.
In the context of a bankruptcy or a foreclosure, seasoning requirements are meant to ensure a prospective borrower has solidly rebuilt their finances before applying for a mortgage.
What are mortgage seasoning requirements?
Exact seasoning requirements depend on the type of mortgage seasoning you’re after: saving for a down payment, qualifying for a refinance or qualifying a mortgage after a bankruptcy or foreclosure.
Down payment seasoning
Most lenders require that money for a down payment and other upfront expenses has existed in an established account belonging to the borrower for at least 60 days. This shows a lender that the funds didn’t come from a temporary or fraudulent source. It also helps the lender discern that you didn’t borrow the funds, as the seasoning period allows a new loan time to appear on your credit history.
To prove that you’re using your own money for the down payment, lenders expect you to share your past two months of bank statements, and if applicable, proof of where any large deposits originated. For example, if you sold some investments or borrowed money from your 401(k), you’ll need to show your lender financial statements documenting that you liquidated the assets and transferred them to your bank.
Bankruptcy and foreclosure seasoning
Before you can buy a home after foreclosure or bankruptcy, a lender will want to see that you’ve recovered financially and are capable of taking on a mortgage. You may be required to wait as long as seven years after foreclosure or four years after a bankruptcy to qualify for a new mortgage, though the period is generally shorter for government-backed loans.
To get a mortgage after bankruptcy or foreclosure, you must meet the following minimum seasoning periods:
| Bankruptcy waiting period | Foreclosure waiting period | |
|---|---|---|
| Conventional loan |
4 years for Chapter 7 or Chapter 11 (2 years with exceptions); 2 years from discharge or 4 years from dismissal of Chapter 13 |
7 years; 3 years with exceptions |
| FHA loan |
2 years for Chapter 7 or Chapter 11; During Chapter 13 (if timely payments have been made for 12 months); 1 year with exceptions |
3 years |
| VA loan |
2 years for Chapter 7 or Chapter 11; 1 year and court permission for Chapter 13 |
2 years |
| USDA loan |
3 years for Chapter 7; 1 year for Chapter 13 |
3 years |
Keep in mind that, if you can prove that you filed for bankruptcy or defaulted on your mortgage due to extenuating circumstances, such as an illness or job loss, and those circumstances have since resolved, you may qualify for the shorter waiting period.
Refinance seasoning
You typically have to wait at least six months to refinance your mortgage after the original loan closed, or 12 months if you’re refinancing a loan you used to purchase a home that was a foreclosure or short sale.
“For a cash-out refinance, the home has to be owned for at least six months before any cash will be paid out,” says Michael Zovistoski, a partner and managing director at UHY LLP, a CPA firm in Albany, New York. “If the home was up for sale during the prior six-month period, a 80 percent loan-to-value is the most that will be approved.”
Government-backed loans may have different seasoning periods before refinancing.
Exceptions to mortgage seasoning
If you’re saving for a down payment, know that not all funds are subject to mortgage seasoning requirements. For example, bonuses received from an employer or tax refunds are generally not held to the same standards as other influxes of funds.
What to do during the seasoning period?
To ensure that the money you’ll use for your down payment, closing costs and other upfront expenses is fully seasoned, transfer it to a savings or money market account — if it’s not already there — as soon as you apply for preapproval. Your financial institution may let you designate part of your savings account for a specific purpose, so you can view these funds separately from the rest of your balance.
Hopefully, by the time you’ve shopped around for the best loan terms and interest rates, toured properties, made an offer and formally applied for a mortgage, the funds will be fully seasoned, and you’ll be that much closer to being a homeowner.
Additional reporting by Mia Taylor
Read the full article here
