What are seasoned funds for your down payment? – The rolling pin
With companies like SMR Research predicting a rapid rise in mortgage rates over the next two years, many first-time homebuyers are looking to buy a home now. If you are one of them, you may find it difficult to understand how collect a deposit so you can buy a home before rates go up.
You may have several options for a down payment, including a tax refund check, a gift from a family member, or even cash out your IRA. Then, of course, there’s the traditional route of simply saving, saving, saving until you have enough for a down payment.
Many first-time home buyers, in particular, use a combination of these approaches because saving a lot of money for a down payment can be tricky, to say the least, when you’re renting. Regardless of how you plan to fund your down payment, keep in mind that certain types of down payment funds may need to be “matched”.
Why Money Can’t Appear From Nowhere
We all know that money doesn’t grow on trees. But it’s especially important when it comes to buying a home that your down payment doesn’t suddenly appear.
Sure, you might get a windfall from a side job, a bonus check, or an unexpected gift from a relative. But you might not be able to miss out and put that bargain on a home.
For lenders, the primary objective is to protect against potential default. That’s why they need a detailed paper trail so they know exactly where your assets came from. It’s also why lenders check your credit score and make sure you have enough income to cover the purchase of a home. If you have good credit and a decent debt-to-equity ratio, the lender can be relatively confident that you’ll be able to continue making payments on your mortgage, rather than default on your loan.
Lenders also want to make sure you don’t receive money from a second loan when you make your down payment. Although you can sometimes take out two loans on one property, lenders generally avoid this, especially with today’s stricter lending standards.
It works like this: if you have two loans, another lender may have a claim on your property if you default, and that’s not a good situation for either lender. Also, an additional loan would change your debt-to-equity ratio, which could disqualify you for the loan you want.
All of this means that lenders want to know exactly where your down payment money is coming from. The money that appears in your bank account will not be enough, even if it comes from a legitimate source.
What are seasonal funds?
To avoid questions from lenders, you may want to use “seasoned funds” for your down payment. Basically, seasoned funds are funds that have been in your bank account for at least 60 days.
“Seasoning” bottoms are easy. You have just collected your money, put it in a bank account (a separate account for your deposit is often preferable), and wait 60 days before applying for a loan.
Most lenders will check your bank account statements for the last two months, and when they see the funds have been there for so long, they’ll assume the money is yours and it’s coming from legitimately.
Also, the 60-day waiting period is enough for an additional loan to appear on your credit report. If you took out a personal loan for your down payment, your lender will know this from your credit report. So don’t try to trick a lender this way.
When bottoms don’t need seasoning
Seasoning the funds in your bank account will make the loan process easier, so it’s best if you can deposit the money you need for your down payment and then wait 60 days before applying for a loan.
But you don’t always do it need to clean up funds before applying for a loan. Here are some situations where seasoning may not apply:
- Salary deductions. If you save a good chunk of each paycheck to buy a home, you don’t have to wait 60 days after you have enough money in your account for a down payment. Your lender will easily be able to see that you have a savings model in place and the money is coming from your paycheck, making it yours automatically, without having to season the funds.
- Pension funds. In some cases, you can cash out your retirement funds without penalty (although you may still have to pay taxes) for first-time home purchase (or construction or rebuilding) expenses. If you can prove that this money is from a legitimate retirement fund source on your behalf, you won’t have to season these funds. In fact, you won’t want to season these funds, because money withdrawn from an IRA for home-buying expenses must be used within 120 days to avoid the penalty.
- Donation fund. If someone helps you buy a house with a gift, you don’t have to season those funds, provided you have a proper paper trail showing where the gift money came from. However, the person giving you the funds may need to season them in their account before transferring the money to you. This is to ensure that the donor has not taken out a loan to give you money for a down payment, expecting you to repay the loan eventually.
The bottom line here is that if you’re not absolutely sure a lender will accept your down payment funds, check with your lender first. Consider meeting with potential lenders three or four months before planning to buy a home to discuss your financing and other home loan details.