If there’s one term you must know about when it comes to buying a home with a mortgage, it’s seasoned funds. It plays a large role in which funds you can and cannot use for your down payment on your home.
While cash is good for almost anything when it comes to paying fees for your mortgage, lenders must be able to source the funds. In other words, they need to know where you got it. You might wonder why they care so much. There’s one reason – they need to know if you took out a loan to get the funds.
If you did take out a loan, it affects your chances of mortgage approval. We aren’t saying that it will cause you a loan denial, but it could cause problems for you down the road.
Keep reading to learn more about how you can season funds.
What are Seasoned Funds?
In the eyes of a mortgage lender, seasoned funds are those that are in your bank account for a minimum of 60 days.
What does this mean for you?
Basically, your lender will require the last 2 months’ of bank statements to verify your cash for closing and/or the down payment. If you have any deposits that exceed 10% of your regular gross income, the lender will ask for verification of fund’s source.
That $1,000 benchmark could vary by lender and your level of risk. If the lender has any reason to suspect that you took a loan, they could ask for verification of any size deposit. What this means is that you cannot just deposit cash into your account a week before closing and expect to use it for your down payment.
If, however, you deposited the funds before the 60-day mark, you might not have to source the funds. This works well for borrowers that tend to save their money under their mattress or in a safety deposit box. Even if the cash is yours, there is no way to prove where it came from if it’s been sitting under your mattress for the last year. This is why making regular deposits and keeping receipts of where the money came from is so important.
What Types of Proof do you Need?
Now, let’s say you do have a couple of large deposits that occurred within the last 60 days, are you out of luck? You aren’t. There are ways you can prove the funds and still use them.
The key is to keep a paper trail of where the funds originated.
Here’s an example:
You have a large investment in stocks. You decide to sell the stocks in order to pay for a down payment on your home. When you submit the order to sell the stocks, you must keep a copy of the order. When you receive the cash, keep a copy of the receipt of the cash. Your next move is to deposit the funds directly into eh account you will use for down payment funds. As you probably guessed, you need to keep the deposit ticket as well.
You will submit all of these documents to the lender. They can then see the paper trail of your work. They see that you sold stocks, received the cash, and deposited it into your bank account. They will then verify that the deposit amount matches the deposit on your bank statement to the penny. It is very important that you deposit every penny you receive so there is no question whether that is the deposit or not.
Receiving Gift Funds
The only exception to the rule of seasoned funds is gift funds. If a relative, employer, or charitable organization gave you money for a down payment, you don’t have to worry about seasoning. What you do have to worry about, though, is proof of where the funds came from, much like the above example
You cannot just accept funds and expect the lender to use them for your down payment. You must document them.
The donor must provide you with a gift letter stating the reason for the funds; the property address you will purchase; and that the funds are not a loan and that you do not expect repayment. Many lenders will also require the donor to provide a bank statement to show that they have the funds. This helps eliminate the risk that the funds are somehow a loan from someone.
You’ll need to keep a paper trail of the funds as well. The donor will need to provide a copy of the withdrawal ticket when taking the funds out of his account. You must then deposit the funds in your account that you will use for the down payment. You should keep the deposit ticket. You’ll then provide a statement showing the funds in your account, again matching to the exact penny.
In general, down payment funds must be seasoned, unless they are a gift. In that case, they just need to be sourced. Lenders just need to make sure the money was legitimately given to you and that it is not a loan of any sort.