When you make a down payment on a home, you can’t just use random money to make it. Lenders need to know where the funds originate. In other words, they need the funds to be seasoned. Just what does that mean and how do you prove it? Keep reading to learn all about it.
What are Seasoned Funds?
Lenders will ask to see your bank account statements for the last 60 days (2 statements). On these statements, they will look for large down payments that don’t’ coincide with your income. If there are large deposits during this time, you can expect the lender to inquire about the source of the funds.
If a lender asks about the deposit, you need to provide proof of where the funds originated. For example, did you get a tax refund or a bonus from work? Those funds are easy to prove and typically acceptable with a lender. If you can’t prove the origination of the funds, though, the lender may assume that the money is from a loan. Lenders cannot accept down payment funds that come from a loan. This affects your debt ratio and your ability to secure the new mortgage.
What’s the Problem With a Down Payment Loan?
Many lenders shy away from borrowers that have to borrow the funds to put down on a home because it puts another lien on the home. If you don’t have any of your own money invested in the home, you pose a higher risk of default. What if you run into financial trouble? Will you care if you walk away from the home? If you didn’t have any of your own money put down on the home, it may be easier to just walk away from it.
Proving Your Funds are Seasoned
So how do you prove that you have seasoned funds? It’s simple – have them in your account for at least two months. Lenders are comfortable with this method because if you did in fact take out a loan for the down payment funds, it would show up on your credit report within that 2-month period. Even if your funds are ‘seasoned’, you can’t hide the loan from the lender.
Now, what about funds that are legitimate, but may not be seasoned? There are a few exceptions to the rule:
- Regular contributions to your savings – If you have payroll deductions or other automatic savings plans set up to create your down payment, you don’t have to wait 60 days after you hit the down payment threshold. You can show the lender your pattern of regular savings contributions, which is usually enough to consider the funds seasoned and available for use.
- Gift funds – If you have a family member or close friend that is giving you gift money for your down payment, you don’t need to wait 60 days after you receive the funds. You do, however, have to have a paper trail to show that the funds are a gift. This includes a gift letter from the donor, proof of receipt of the funds with a deposit ticket, and proof of deposit in your own account.
- Retirement funds – If you use your 401K or IRA savings to put money down on a home, you don’t have to season those funds either. Again, you’ll need that paper trail to show lenders where the money came from and whether or not it’s required to be paid back, (401Ks usually have to be paid back).
The best thing you can do if you have unseasoned funds is have an explanation for the lender. Anything that you can put in writing and include proof of the origination of the funds will help. Lenders are going to scrutinize every deposit you make unless they know it’s tied to your income. The more proactive you are with supplying the proof of its origination, the better your chances of the lender accepting it.
Your explanation must be detailed and truthful. Again, the paper trail speaks for itself. It gives the lender something to rely on rather than just your written word. If you have a decent explanation of the origination of the funds and it’s clear that it’s not any type of loan, you may be able to get away with using it for your down payment.