Did you know that when you take out a mortgage, you can’t just use any money that you come across for your down payment or closing costs? Lenders want what’s called ‘seasoned funds.’ Just what does this mean and how does it affect you?
Keep reading to find out.
What are Seasoned Funds?
Seasoned funds, in the eyes of the lender, are funds that have been in your bank account for at least 60 days. They are seasoned because they have been in your account for at least two months. That’s plenty of time for any loans, such as a second mortgage or a personal loan, to pop up on your credit report. Lenders can then put two and two together, figuring out that you borrowed the money for the down payment.
If the money sits in your account for at least 60 days and there aren’t any new loans on your credit report within that time, the money is considered sourced. The lender won’t ask for proof of origination. Instead, they consider it your money and you are free to use it for the down payment, closing costs, or qualifying purposes.
Why can’t you Just Add Money to Your Account?
It seems silly that you just can’t add money to your account, right? It’s your money after all. But, lenders need to protect themselves against default. They need to know that the money in your account belongs to you and you are free to spend it without the worry of repayment.
Even in situations, such as receiving a bonus from work, getting a tax refund, or receiving money for your wedding must be sourced or you must wait until the funds are in your account for at least 60 days. Fortunately, it’s easy to source money from most situations, such as:
- Selling property
- Selling a car
- Selling stocks or bonds
- A bonus from work
- A tax refund
If you can provide proof of the funds, you can use them even when they aren’t yet seasoned. If you can’t provide proof of origination, wait at least 60 days or you risk loan denial.
Lenders need to protect themselves. They need to know that you can easily make the mortgage payment. If you can’t source the money, they assume one of two things:
- You borrowed the funds and must pay them back
- You are just using the funds to inflate your account to get qualified
Obviously, inflating your account doesn’t work. You need the money for the actual down payment and closing costs. Borrowing funds affect your debt ratio and your ability to repay the mortgage, which could lead to a loan denial.
What Funds Don’t Need to be Seasoned?
While it all sounds complicated, there are some funds that you don’t have to worry about seasoning:
- Automatic deductions – If you have a portion of your paycheck deducted every pay period and placed in a savings account, lenders can see the pattern. You don’t have to wait until all the money is in there for 60 days. The proof from the last several paychecks will be plenty to prove your intentions.
- Retirement accounts – If you are a first-time homebuyer or you are of retirement age, you may take funds from your retirement account. Providing your retirement statement and your deposit ticket is plenty to prove where the funds came from. You don’t have to wait until you have the funds in hand for 60 days.
- Gift funds – Family, close friends, employers, and charitable organizations may provide you with gift funds. This is money they give you rather than loan you. With proper documentation, you don’t have to worry about seasoning these funds.
Most loan programs allow the use of at least some gift funds. In order to accept them, seasoning or not, you need a gift letter and proof of the funds’ transfer. The gift letter must include:
- Name and identifying information for the donor
- Relationship between you and the donor
- Amount of the gift
- Reason for the gift including the property address
- A statement that the money isn’t a loan and no repayment is expected
- Date of the gift
Lenders use the gift letter along with proof of the deposit on your end to accept gift funds. If they are worried about where the funds came from, they may ask the donor for proof of funds’ origination. Providing the last two months of bank statements, investment statements, or the bill of sale of an asset will suffice.
If you are unsure about whether your funds are seasoned or not, talk to your loan officer. As a general rule, if the funds are in your account for 60 days, you’re good. Of course, every lender has its own rules. Some may still require proof of the funds’ origination if it’s an extra-large deposit. Carefully evaluate your steps before applying for a mortgage for the best results.