Have you ever applied for a mortgage or refinanced your home? If so, you probably still remember the amount of paperwork involved in getting your mortgage approved.
Among those demands, most lenders require several months of bank records. They do so to ensure that you have the money on hand to meet payment obligations and that the cash stays in your account for a while as a sign of financial stability. Lenders often provide a set timeframe for you to qualify for their requirements. These requirements are often known as mortgage seasoning requirements.
What is seasoned money?
One of the most common phrases you’d hear relating to mortgage seasoning is “seasoned money.” Seasoned money refers to funds that have been sitting in your established bank account for a while. Usually, the funds would have to be in your account and shown on your bank statements for at least two months.
To secure financing, you will need seasoned money to cover the down payment and closing costs. During the mortgage underwriting process, the underwriter will review everything on your bank statements. If your financial situation is relatively stable and you don’t have lots of funds going in and out of your account, you won’t need to do much. However, you’ll likely need to provide a letter of explanation if they notice any large cash inflows or outflows to your account. Lenders do so to make sure that the money is indeed yours and that you didn’t take out any sort of loan to satisfy the seasoned money requirements.
Why do lenders require seasoning?
Lending institutions take on significant risks when approving a loan. Therefore, they want to ensure the borrower can meet the financing obligations in the long term.
Of course, lenders also base their decision on other factors, including your credit score and income. But a borrower who has had large sums of cash for a long time – a.k.a. seasoned money – will be perceived as more trustworthy. Therefore, they are more likely to be approved for a loan with more advantageous terms.
Types of mortgage seasoning requirements
Loan seasoning requirements vary widely depending on your circumstances and the type of loan you are applying for. In addition, each lending institution may have additional guidelines you must satisfy when applying for a mortgage. Some exceptions may be possible, and underwriting teams may be willing to consider your loan application on a case-by-case basis. However, you must be prepared to jump through additional loops and provide detailed paperwork justifying any irregularities or unusual movement.
Below are some common loan seasoning requirements you may encounter when applying for a home loan or refinancing.
Cash seasoning
You may be excited at the perspective of finally being within arm’s reach of your dream home after receiving a generous donation from a family member. Of course, you’d want to put it towards your homebuying journey to cover the down payment and closing costs. But not so fast! Any sudden changes in your savings will immediately send a red flag to the underwriting team.
Conventional loans
One of the seasoning requirements for conventional loans is that no part of the down payment should be borrowed. One of the lenders’ main concerns is loans disguised as gifts, as any loans may affect the borrower’s ability to repay the mortgage. Therefore, the lender may ask that the benefactor provides a signed gift letter clarifying their position. You may also need to verify the gift funds transfer. If you own a vacation rental property, be ready that your underwriter may ask you to explain the rental income.
Most lenders require the funds to be in your account for at least 60 days before being used toward a home purchase with a conventional loan. Because of this, some borrowers may attempt to go around this rule by obtaining supplemental funds several months before applying for a loan, so the extra cash appears as seasoned money. However, the underwriters can quickly discover such deception if they request additional banking statements.
FHA loans
The “no borrowing” rule is also part of the FHA seasoning requirements. FHA loans require borrowers to contribute a minimum 3.5% down payment, plus closing costs. The cash must be sourced and seasoned for at least three months, although gift funds are acceptable.
Other forms of a sudden influx of cash on your bank account will also need to be justified for underwriters to consider it as a source for a down payment. This could include, for example, an inheritance, cashing in a trust fund or saving account, or lottery winnings. Most lenders can be lenient on gifts from uninterested third parties. Still, they will require that any other form of cash input be held in a financial institution for at least two months before being considered a qualifying factor for a home loan. Underwriters may deny cash savings deposits (a.k.a. “mattress money” since their provenance cannot be verified and could be fraudulent.
Bankruptcy and foreclosure seasoning
Bad things happen to good people, but a bankruptcy or a foreclosure will be a red flag for any loan application or refinancing. Mortgage underwriters typically expect would-be borrowers to have been back on their feet for at least several years before qualifying for a home loan. The minimum seasoning guidelines vary widely depending on the loan type, the bankruptcy chapter you filed for, and the presence of any extenuating circumstances that may have changed in the meantime.
The table below outlines the bankruptcy and foreclosure seasoning requirements for different types of loans.
| Conventional Loans | FHA Loans | VA Loans | USDA Loans | |
| Bankruptcy | Up to 4 years | Up to 2 years | Up to 2 years | Up to 3 years |
| Foreclosure | Up to 7 years | Up to 3 years | Up to 2 years | Up to 3 years |
These guidelines may be adjusted based on several factors, such as your credit score before the bankruptcy, credit gained since the event, whether it was a one-time event, and so on. Lending institutions may also consider elements such as on-time rental payments for at least a year, a steady income for two or more years, and a debt-to-income ratio below 43% as proof of financial stability. Therefore, it may be worth inquiring about your lenders’ different rules when applying for a loan.
> Learn more: How to Avoid Foreclosure?
Refinance seasoning
Refinancing is often touted as an opportunity for homeowners to reduce their monthly payments, qualify for a lower interest rate, pay off their property faster, change lenders, or pull out the equity off their home. However, most lending institutions request a seasoning period of at least six to 12 months between the original and second loan and between refinancing.
There may be additional cash-out refinance seasoning requirements depending on the loan program you are applying for. It also matters whether the property was acquired through an arms-length transaction or other circumstances. These include properties acquired through an inheritance, separation, divorce, or dissolution of a domestic partnership. The lenders can also add overlay guidelines with more significant seasoning requirements than the ones provided by Fannie Mae or Freddie Mac.
> Learn more: How Often Can You Refinance?
Conclusion
Mortgage seasoning requirements provide a safety layer for lending institutions to qualify borrowers. However, it is only one of the conditions set up by lenders to determine eligibility for a mortgage or refinancing. Do not hesitate to investigate the lenders’ requirements in detail when shopping for a loan.
In addition, some non-qualified loans and hard-money lenders may have more lenient requirements, which may include mortgage seasoning.
