Mortgage seasoning: What is it and what are the requirements?

If you’re looking to buy a home, you’re probably familiar with the seasonality of the real estate market. But it’s also important to understand seasoning when it comes to your mortgage. Let’s look more closely at mortgage seasoning — what it is and what its requirements are.

What is mortgage seasoning?

“Seasoning” in regards to a mortgage refers to the amount of time lenders require funds to have been in your bank account — specifically, the funds that are going to cover your down payment, closing costs and other upfront expenses. They want to see that you’ve had the cash (or highly liquid assets) on hand for a prescribed period — that the money didn’t simply show up out of thin air right before you applied for a mortgage.

How does mortgage seasoning affect the loan process?

To prove your financial credibility, you need to have the funds for your down payment in your bank account for some time before using them. If they appear suddenly, this can slow the loan processing down as you’ll need to account for where they came from. For instance, if they were a gift from a relative, you’ll need to submit a gift letter to your lender.

Mortgage seasoning can also refer to the time you’ve had your current mortgage. This becomes a factor if you’re trying to remove mortgage insurance or refinance. For example, you may need to have your mortgage for a specific time — often at least six months — before refinancing.

Why do lenders require seasoning?

Mortgage seasoning requirements allow lenders to establish the creditworthiness of prospective borrowers. It helps them avoid borrowers who may be attempting to engage in mortgage fraud or who may have obtained the money for a down payment through illegal means. Seasoning also helps lenders verify the financial stability of borrowers and reduces the risk that they might default.

“You can think of loan seasoning like wine aging; the longer the wine ages, the better the taste,” says Bruce Ailion, an Atlanta-based real estate attorney, Realtor and investor. “The longer you make payments on a loan or save money for a down payment, the better qualified you are as a borrower.”

What are mortgage seasoning requirements?

Generally, lenders want to see that money has been in an established account anywhere from 60 to 90 days. If you keep the cash in your account for a few months, at least, before applying for a mortgage, that money becomes seasoned. Lenders will see the money has been there for a while and view it as legitimately yours. That also allows for enough time for a new loan to appear on your credit history, letting the lender know whether you borrowed that cash.

The exact seasoning requirements — how long it takes for funds to be considered seasoned — can vary depending on the type of loan you apply for and your financial history.

Down payment seasoning

When getting a mortgage, most lenders have a minimum down payment requirement that can depend on your credit score and the kind of loan you’re after. Over the last several years, however, lenders have increasingly required not only that you have the money to cover a down payment but also that the down payment be seasoned. That means that the funds must have existed in the borrower’s bank account for a specific amount of time, usually at least 60 days.

“A lender wants to see that a borrower didn’t obtain these down payment funds from a temporary or fraudulent source simply to qualify for a loan,” says Jason Vanslette, an attorney and partner with the firm Kelley Kronenberg in Fort Lauderdale, Florida.

To prove that you’re using your own money for the down payment, lenders expect you to share your past two months of bank statements, and if needed, proof of where the funds originated.

“If those statements show a large deposit that isn’t from your paycheck, you have to explain where the money came from,” says Michelle Crubaugh, branch manager for Planet Home Lending in Wichita, Kansas. For example, if you sold some investments or borrowed funds from your 401(k), you’d want to show financial statements documenting that you had these assets, the liquidation of them and the transfer of the funds to your bank account.

Bankruptcy and foreclosure seasoning

Before you can buy a home after foreclosure or bankruptcy, lenders also want to see good financial moves from you.

“Different lenders have different seasoning periods required, but as a general rule, you will not be considered for a loan until at least a year after a bankruptcy discharge or four years following a foreclosure,” says Ailion.

To get a mortgage after bankruptcy or foreclosure, you must meet the following minimum seasoning periods:

Many lenders require a seven-year waiting period after a bankruptcy or foreclosure before they will lend to a borrower again. “But this can be decreased based on several factors, such as your credit score before the foreclosure/bankruptcy, credit gained since the event, whether it was a one-time event and whether or not extenuating circumstances have changed since the underlying event,” says Vanslette.

Refinance seasoning

You typically have to wait at least six to 12 months to refinance your mortgage after the original loan closed, though there could be exceptions.

“To a lender, the length [of] time you’ve been making payments on a mortgage can make a great deal of difference if you wanted to change the terms by refinancing or take out equity all of a sudden,” says Vanslette, adding that a 12-month requirement usually applies to refinances for homes purchased through a foreclosure or short sale, as well.

“For a cash-out refinance, the home has to be owned for at least six months before any cash will be paid out,” says Michael Zovistoski, a partner and managing director at UHY LLP, a CPA firm in Albany, New York. “If the home was up for sale during the prior six-month period, a 70 percent loan-to-value is the most that will be approved.”

If you’re aiming to eliminate private mortgage insurance (PMI) by refinancing, you’ll need to have at least 20 percent equity in your property. “There is often a seasoning requirement of approximately two years before a homeowner can refinance to get rid of PMI, although this varies by lender,” says Zovistoski.

For the most part, though, homeowners who are refinancing don’t have to deal with seasoning issues, as very few of them try to restructure their mortgage payment or take out equity within six months after closing on their first mortgage.

Reverse mortgage seasoning

If you’re interested in a reverse mortgage, lenders will look closely at how long you’ve lived in your home and your ability to prove you’ll remain in it as your primary residence.

“Many reverse mortgage lenders will require certain documented proof from you, such as utility bills for a covered period, affidavits of ownership and other mailing evidence suggesting you’ve used the property as your primary residence for the previous year or longer,” says Vanslette.

For a Home Equity Conversion Mortgage (HECM), which is backed by the federal government, there is a 12-month seasoning period that begins at the time of closing.

“Each lender can add on additional seasoning requirements, which will be disclosed as part of the purchase contract,” says Zovistoski.

Exceptions to mortgage seasoning

Not all funds are subject to mortgage seasoning requirements. Bonuses received from an employer and tax refunds, for instance, do not need to adhere to seasoning timelines. You can typically use these funds to cover the cost of a down payment immediately.

Money gifted from a relative does not necessarily need to be seasoned either. But if the money appears in your bank account less than 60 days before applying for a mortgage you’ll need to provide documentation that it was a gift.

What to do during the seasoning period?

At the start of your house-hunting journey, transfer money to a savings or money market account to let it start seasoning as you apply for mortgage preapproval. The longer the cash is there, the better you’ll look to lenders as you shop around for the best loan terms and interest rates. Let it continue to cook as you start looking at listings and touring properties, and don’t touch it. Try not to run up any new sizable debt, take out other loans or do anything else that could lay claim to the money, as well.

Ideally, by the time you make an offer on a home and formally apply for a mortgage, your funds will be fully seasoned (or close to). Then, the lender can process your loan, and you can get closer to becoming a homeowner.

Additional reporting by Mia Taylor