Mortgage Seasoning: What It Means And Why It Matters

US mortgage rates remained high in the week ending September 21, with a recorded uptick in the 30-year fixed rate at 7.19 percent, up from 7.18 the previous week. This average rate has been above seven percent for six consecutive weeks.

High mortgage rates can be discouraging for homebuyers like you. Homebuilders are also feeling the effects as housing demand cools off due to these high rates and persistent inflation. Furthermore, decreasing construction levels can significantly impact the already low housing supply.

In addition to these factors, lenders are keen on checking homebuyers' financial track records, a process known as mortgage seasoning. As a first-time homebuyer, you may perceive this system as an additional burden. But what exactly is its purpose?

Defining Mortgage Seasoning

Mortgage seasoning refers to the duration set by lenders to determine how long funds have been in your bank account. Its aim is to assess your ability to repay your mortgages.

For instance, lenders will question any significant influx of funds into your bank account, especially shortly before your mortgage application. They want to ensure that these funds aren't illegal or obtained from another loan that could affect your ability to repay.

Mortgage seasoning helps ensure you have the necessary funds for down payment, closing costs, and usually the first six months of potential mortgage payments before you submit an application or apply online for a home loan or refinancing.

If you're ready to apply but only recently received the necessary funds, you might need to wait until they meet your chosen lender's time frame. You can enjoy better terms and rates when your money has seasoned.

Types of Mortgage Seasoning Requirements

Lenders also evaluate whether you've refinanced, experienced foreclosure or a short sale, or declared bankruptcy. These factors won't automatically disqualify you from getting a loan if you meet the lender's conditions.

However, lenders' seasoning requirements depend on the loan program you choose. Here's how they generally impose their prerequisites for different situations and loan types:

Cash

In the initial stages of evaluation, lenders usually request the most recent two- or three-month bank statements for cash seasoning.

While they want to ensure you have funds for the down payment and other costs, they also want to see your money's paper trail. Most lenders check for sufficient funds for at least the past two months. They may question you if there's a sudden influx of money that doesn't appear to come from your regular income.

For example, a rapid increase of $35,500 from a $3.50 balance within a short period raises a red flag, prompting the lender to inquire about the source of this sudden amount.

Some lenders accept funds beyond two months to make the money more seasoned. Questions are usually raised when they request earlier bank statements showing your recent cash influxes.

Refinance

Lenders might find it dubious when you refinance shortly after taking a mortgage loan. Most lenders want to examine your track record of mortgage payments within six to 12 months. Lenders may not allow you to refinance if you took out a loan only three to five months ago. The general time frame is essential to ensure they approve your refinance with the best rates.

Most mortgage programs impose a two-year seasoning period if you're refinancing an FHA loan to avoid the private mortgage insurance (PMI) premium. You can only borrow up to 80 percent of the property value to eliminate PMI, but it takes time to build this home equity.

However, lenders can make exceptions for home renovations. For example, lenders may allow you to refinance a new mortgage after renovations if you've purchased a fixer-upper.

Bankruptcy and foreclosure

Bankruptcies and foreclosures won't prevent you from taking mortgages again, but they temporarily restrict you from borrowing. This temporary ban generally lasts two to four years for bankruptcies and up to seven years for foreclosures.

Each mortgage loan program has distinct rules regarding how recently you have declared bankruptcy or gone through foreclosure. Even if lenders see them on your credit report, you must disclose them. This way, you can ask about alternative programs that allow more recent bankruptcies or foreclosures if you have one.

Cash-out refinance

Cash-out refinancing involves converting your home equity into cash. In this loan type, you can get a new home loan that's higher than your previous one.

Most mortgage lenders allow cash-out refinancing after homeowners have built some equity. However, don't expect them to approve your application if you're seeking cash out within the first six to 12 months of owning your home. Similarly, they might disapprove another cash-out refinance if you've already had one within a year.

Applying for cash-out refinancing within these short periods makes lenders think you're financially unstable. Additionally, refinancing can entail substantial closing expenses, extend your debt, and reset your amortization schedule. Thus, it's best to avoid cash-out refinancing unless it's necessary.

Remember that building home equity takes time. Lenders will provide a smooth cash-out refinance once you've established higher equity. You may even qualify for better terms and interest rates.

Down payment

Most lenders require a minimum mortgage down payment depending on your credit score and loan type, typically between three to 20 percent. However, in recent years, many have started seasoning the down payment, requiring you to have down payment funds in your bank account for at least 60 days.

To verify that you're using your own money for the down payment, lenders will request your two-month bank statements and proof of the source of funds when needed.

Conventional loans generally don't allow loans to cover the down payment. If you can't meet the minimum requirement or are short a few dollars, a loved one can provide a gift to cover the down payment. You must submit an authorization letter from the benefactor stating that you've accepted a gift to cover the down payment.

Reverse mortgage seasoning

A reverse mortgage lets you get a loan using your home as collateral. Unlike traditional mortgages, you don't need to make monthly payments. You'll only repay the loan when you move out of the house.

If you opt for a reverse mortgage program like a home equity conversion mortgage (HECM), the Department of Housing and Urban Development (HUD) requires one year of seasoning for existing liens. Expect a similar requirement for other reverse mortgage programs.

Furthermore, lenders require homeowners to live in their properties as primary residences for at least 12 months before they can take out a reverse mortgage.

Are there any exceptions?

Yes, some lenders have exceptions that make it easier to apply for mortgages. Note that these loans may involve longer underwriting processes and more paperwork than usual.

Seasoning doesn't typically apply to the following conditions:

Accepting gifts to cover down payment and closing costs
Inheriting a property
Gaining property through a divorce court decision
Renovations and renovated properties
Transferring majority ownership of an LLC-owned property to yourself
Investment property mortgages

Understand Mortgage Seasoning for Smooth Home Loan Approvals

Lenders require mortgage seasoning to protect themselves against high-risk borrowers. However, approval can be more flexible when you have a high credit score. The higher your credit score, the lower your risk, increasing your chances of approval.

You don't have to abandon your dream of buying a home due to mortgage seasoning. Understanding how it works can help you navigate the process smoothly and efficiently. For more insights on getting your mortgage loan approved, consult a loan officer.