Key Takeaways
- Seasoning requires funds to be in your account for 60+ days.
- It proves the money isn't borrowed, reducing fraud risk.
- Unseasoned funds need documentation before mortgage approval.
- Gift funds require a letter to confirm they're not loans.
Article Summary
Seasoning refers to the length of time that money is in a home buyer's bank account before it is used to purchase a home. Longer seasoning periods are linked to lower probabilities of fraud and default.
Seasoning: Explained in Plain English
Seasoning helps mortgage lenders ensure the legitimacy and stability of a home buyer's finances. Sixty days is a common time frame for funds to be considered "seasoned."
Seasoning requirements are part of a lender's due diligence. They reduce the potential for mortgage fraud and money laundering. Lenders are particularly cautious when large sums appear in a home buyer's bank account without prior history.
By definition, large, unexpected deposits in a bank account are "unseasoned."
Unseasoned funds must be documented before being used for mortgage approval or wired to a closing. Cash gifts can be documented with a mortgage gift letter, and federal tax refunds can be documented with an IRS receipt.
Other large deposits, like an inheritance, may require a letter of explanation.
Seasoning is a critical part of a mortgage approval because unseasoned or unexplained funds cannot be used to purchase a home.
Seasoning: A Real World Example
Imagine a first-time home buyer who receives a $10,000 gift from a family member to help with their down payment. The lender requires the funds to be seasoned for at least 60 days before they can be used for the purchase.
When applying for an FHA mortgage, the lender scrutinizes the recent deposit and asks about its origin. The lender's concern is that the deposit might be a loan, which could affect the buyer's ability to make the mortgage payments. The borrower then provides a gift letter confirming that the gift is not a loan.
Once the lender approves the deposit, the cash gift can be used for a down payment.
Common Questions About Seasoning
Get answers to frequently asked questions about seasoning requirements, documentation needs, and how seasoning affects mortgage approval.
Why do lenders require seasoned funds for a down payment?
Lenders require seasoned funds to reduce the risk of fraud and ensure the down payment funds are not borrowed. Seasoning helps lenders evaluate a home buyer's financial situation and assess the risk of default.
What happens if a borrower has unseasoned funds in their account?
If a borrower has unseasoned funds in their account, the lender will require documentation of the source. The mortgage application will only consider funds with an acceptable paper trail.
How long do funds need to be seasoned for mortgage approval?
Typically, funds need to be seasoned for at least 60 days. However, this period may vary based on the lender's policies and the specifics of the mortgage application.
Can unseasoned funds lead to mortgage application rejection?
Yes, unseasoned funds can result in a mortgage application being rejected. If a borrower cannot provide documentation for recent large deposits, the lender may consider it a risk, affecting approval.
If I receive a cash gift 6 months before I apply for a mortgage, are the funds seasoned?
If the cash gift was received 6 months before applying for a mortgage, it is considered seasoned. However, the lender may still ask for documentation regarding the gift's origin.
