What is Mortgage Seasoning?

If you’re in the market for a new home, you’re likely aware of the real estate market’s seasonal trends. However, it’s also crucial to understand “seasoning” in relation to your mortgage. Let’s explore what mortgage seasoning is and the requirements associated with it.

What is mortgage seasoning?

In the context of a mortgage, “seasoning” refers to the length of time lenders require your funds to have been in your bank account. This includes the money designated for your down payment, closing costs, and other upfront expenses. Lenders want to ensure that these funds have been in your account for a specific period and were not deposited just before applying for the mortgage.

How does mortgage seasoning affect the loan process?

To establish your financial credibility, it’s important that the funds for your down payment have been in your bank account for a while before using them. Sudden deposits can delay the loan process as you’ll need to explain their origin. For instance, if the funds are a gift from a relative, you’ll need to provide a gift letter to your lender.

Mortgage seasoning can also refer to the duration of time you’ve held your current mortgage. This becomes relevant if you’re seeking to remove mortgage insurance or refinance. For example, you might need to have your mortgage for a specific period, often at least six months, before you’re eligible to refinance.

Why do lenders require seasoning?

Mortgage seasoning requirements help lenders assess the creditworthiness of potential borrowers. They ensure that funds for a down payment have been in your account for a sufficient period, which helps prevent mortgage fraud and verifies the legitimacy of the money. Additionally, seasoning provides insight into a borrower’s financial stability and reduces the risk of default.

As Bruce Ailion, an Atlanta-based real estate attorney, Realtor, and investor, puts it, “Think of loan seasoning like aging wine; the longer the wine ages, the better it tastes. Similarly, the longer you make payments on a loan or save for a down payment, the more qualified you appear as a borrower.”

What are mortgage seasoning requirements?

Typically, lenders prefer to see that funds have been in an established account for 60 to 90 days. By keeping the cash in your account for a few months before applying for a mortgage, you allow it to become seasoned. This demonstrates to lenders that the money has been legitimately yours for some time. Additionally, this period provides enough time for a new loan to appear on your credit history, which helps lenders verify whether the cash was borrowed.

The specific seasoning requirements can vary based on the type of loan you apply for and your individual financial history.

Down payment seasoning

When applying for a mortgage, most lenders require a minimum down payment that varies based on your credit score and the type of loan. Recently, however, there has been a growing emphasis not only on having the funds for the down payment but also on having those funds seasoned. This means the money must be in your bank account for a specific period, typically at least 60 days.

“A lender wants to ensure that the down payment funds are not from a temporary or fraudulent source just to meet loan qualifications,” says Jason Vanslette, an attorney and partner at Kelley Kronenberg in Fort Lauderdale, Florida.

To verify that the down payment funds are genuinely yours, lenders generally require the last two months of bank statements and, if necessary, proof of the funds’ origin.

“If your statements show a significant deposit not from your regular income, you’ll need to explain its source,” says Michelle Crubaugh, branch manager at Planet Home Lending in Wichita, Kansas. For instance, if you sold investments or borrowed from your 401(k), you’ll need to provide financial statements that document the assets, their liquidation, and the transfer of funds to your account.

Bankruptcy and foreclosure seasoning

Before you can buy a home after a foreclosure or bankruptcy, lenders will want to see that you’ve made sound financial decisions since the event.

“While seasoning periods can vary by lender, a common rule of thumb is that you won’t be eligible for a mortgage until at least one year after a bankruptcy discharge or four years after a foreclosure,” says Ailion.

To qualify for a mortgage following bankruptcy or foreclosure, you need to adhere to these minimum seasoning periods:

Many lenders typically require a seven-year waiting period after a bankruptcy or foreclosure before they will consider lending to a borrower again. However, this period can be shortened based on several factors, including your credit score prior to the foreclosure or bankruptcy, your credit history since the event, whether it was an isolated incident, and any changes in circumstances since the event, according to Vanslette.

Refinance seasoning

Typically, you must wait at least six to 12 months after closing on your original mortgage before refinancing, although exceptions may apply.

According to Vanslette, the length of time you’ve been making payments on your mortgage can significantly impact your ability to refinance or access equity. A 12-month waiting period is often required for refinancing homes purchased through foreclosure or short sale.

For a cash-out refinance, the property must be owned for a minimum of six months before any cash can be released. If the property was listed for sale in the prior six months, the maximum loan-to-value ratio allowed is 70 percent, explains Michael Zovistoski, a partner and managing director at UHY LLP in Albany, New York.

If your goal is to eliminate private mortgage insurance (PMI) through refinancing, you generally need at least 20 percent equity in your home. “A seasoning requirement of around two years is common before homeowners can refinance to remove PMI, though this can vary by lender,” notes Zovistoski.

Overall, most homeowners don’t encounter seasoning issues when refinancing, as few attempt to restructure their mortgage or access equity within six months of their initial mortgage closing.

Reverse mortgage seasoning

If you’re considering a reverse mortgage, lenders will carefully assess how long you’ve lived in your home and your ability to demonstrate that it will remain your primary residence.

“Many reverse mortgage lenders require documented proof, such as utility bills for a specific period, affidavits of ownership, and other correspondence indicating that the property has been your primary residence for the past year or longer,” says Vanslette.

For a Home Equity Conversion Mortgage (HECM), which is federally insured, there is a mandatory 12-month seasoning period starting from the closing date.

“Lenders may impose additional seasoning requirements, which will be outlined in the purchase contract,” adds Zovistoski.

Exceptions to mortgage seasoning

Not all funds are subject to mortgage seasoning requirements. For example, bonuses from an employer and tax refunds typically do not need to meet seasoning timelines and can generally be used for a down payment right away.

Money gifted from a relative also may not need to be seasoned. However, if the gifted funds appear in your bank account less than 60 days before applying for a mortgage, you’ll need to provide documentation proving that the funds were a gift.

What to do during the seasoning period?

At the beginning of your house-hunting process, transfer money to a savings or money market account to allow it to start seasoning while you apply for mortgage preapproval. The longer the funds remain in the account, the more favorably lenders will view them as you compare loan terms and interest rates. Keep the money untouched as you explore listings and tour properties, and avoid accumulating significant new debt, taking out additional loans, or making other financial moves that could affect the funds.

Ideally, by the time you make an offer on a home and submit a formal mortgage application, your funds will be fully seasoned or nearly so. This will enable the lender to process your loan efficiently and bring you closer to homeownership.