What is Seasoning?

Seasoning refers to the length of time that money is in a home buyer’s bank account before it’s used to purchase a home. Longer seasoning periods are linked to lower probabilities of fraud and default.

A Longer Definition: Seasoning

Seasoning is a means for mortgage lenders to ensure the legitimacy and stability of a home buyer’s finances. 60 days is a standard time 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 warning or precedent.

By definition, large, unexpected deposits in a bank account are “unseasoned.”

Unseasoned funds must be documented before being used for a 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, often require a letter of explanation.

Seasoning is a critical component of a mortgage approval because unseasoned, unexplained funds cannot be used to purchase a home.

Seasoning: A Real World Example

Consider a homebuyer who has been saving for a down payment. A few months before the purchase, they receive a significant financial gift, which they add to their savings.

When applying for an FHA mortgage, the lender scrutinizes the recent deposit and inquires about its origin. The lender’s concern is that the deposit is a loan, which could affect the buyer’s ability to repay the mortgage monthly. The borrower then provides a gift letter, confirming the nature of the gift and that it is not a loan.

When the lender approves the deposit, the cash gift can be used for a down payment.

Common Questions About Seasoning

Why do lenders require seasoned funds for a down payment?

Lenders require seasoned funds to mitigate the risk of fraud and ensure the funds used for a down payment are not borrowed. Seasoning requirements help lenders assess a home buyer’s true financial capability and 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 consider only explained deposits or funds with a clear paper trail.

How long do funds need to be seasoned for mortgage approval?

Typically, lenders require funds to be seasoned for at least 60 days. However, this period can vary depending on the lender’s policies and the specific circumstances of the mortgage application.

Can unseasoned funds lead to mortgage application rejection?

Yes, unseasoned funds can lead to the rejection of a mortgage application. If a borrower cannot provide satisfactory documentation for recent large deposits, lenders may view this as a risk factor, questioning the borrower’s financial stability and ability to repay the loan.

If I receive a cash gift 6 months before I apply for a mortgage, are the funds seasoned?

In this scenario, the cash gift is seasoned, and the lender reserves the right to request additional documentation about the source of the gift.