If you want to use your own funds for a down payment or closing costs on a mortgage, they must be seasoned funds. Just what are seasoned fund requirements and how do you get around them? Keep reading to find out more.
The Definition of Seasoned Funds
Seasoned funds are funds that sat in your bank account for at least 60 days. Most lenders ask you for the last two months of bank statements preceding your loan application. They may also ask for a current bank statement right before you close on your loan.
Lenders need these bank statements to see what deposits you’ve made within the last two months. Every deposit must line up with something that the lender is already aware of, such as your income. If you have any large deposits (most lenders consider a deposit that exceeds 25% of your monthly income large), then the lender will need to see where the funds originated. Every lender will have their own requirements regarding what they consider a ‘large deposit’ though – some may see red flags with any deposit over $100, while others are a bit more lenient.
Proving the Origination of the Funds
If the lender can’t determine beyond a reasonable doubt that your funds originated from your income, they will ask for proof of the funds. In other words, they want to know where the funds came from and how you got them.
Some of the following are common places that the money originates:
- Sale of an asset
- Tax refund
- Bonus from work
- Commission from work
- Gift from a relative or friend
It’s not enough to tell a lender where the funds came from, though. For example, you can’t just say that you sold your car and that’s where you got the large deposit from – you have to prove it.
Just how do you prove the origination of your funds? You need paperwork. Lenders like paper trails because it gives them a way to track the funds, knowing beyond a reasonable doubt that the money didn’t come from a loan.
For example, if you sold your car, you would have the Bill of Sale, a copy of the cashier’s check provided, and a copy of the deposit ticket from when you deposited the funds. The lender will verify that the amounts match exactly on each of these documents to ensure that they are legitimate.
The same is true for any other source of funds. If you receive a tax refund, you have your tax returns plus the check stub from the check written to you or a copy of your bank statement on the date of the funds transfer.
The only place it may get sticky is if you receive gift funds. First, you need a reason for the gift funds. Did you just get married or have a large celebration? Proving that the event occurred and showing copies of the checks provided with the dates corresponding to the event date can help. Lenders may have a few more questions and/or concerns with gift funds, though, so prepare yourself for many questions.
Funds That Don’t Need Seasoning
Luckily, there are some funds that you don’t have to worry about the seasoning issue. These funds are those that lenders can verify beyond a reasonable doubt, knowing that they aren’t a loan. They include:
- Payroll deductions – If you have your employer automatically deduct a portion of your income to put towards your savings account, the lender can verify the deposit with your paystubs. Even if you put more than half of your check toward that account, the lender won’t require seasoning.
- Funds from your 401K – If you are eligible to borrow money from your 401K you won’t have to wait 2 months to use the funds to purchase a home. In fact, you should wait to withdraw the funds until you are just about ready to buy a home as the law states you only have 120 days to use the funds.
- Gift funds – Money from a friend or relative for the express reason of purchasing a home may not need seasoning either. You will have to provide a paper trail to prove where the funds originated and that the funds aren’t a loan, but you don’t have to wait two months to use them.
Providing a Paper Trail
If you have unseasoned funds that don’t meet any of the above requirements, you may be able to get around the seasoning requirements if you have a paper trail. What does this mean? Here’s an example.
You have two bank accounts. One is a savings account and the other a checking account. You provide the lender with your checking account statements because that’s the account that you will use to pay for your closing costs. On that statement is a large deposit of $10,000 last month. The lender wants to know where it came from – is it a loan? There’s not two months’ worth of seasoning there, so technically, the lender should not let you use it.
Here’s the catch. Since you transferred the funds from your savings account and the money was in your savings account for a few months, technically, it’s seasoned funds. You just have to provide the lender with your savings account statements for the last two months to show the seasoning as well as the withdrawal of the exact amount, $10,000. You can then show the deposit (hopefully on the same day) to your checking account. Since the two amounts and dates coincide, the lender will likely allow you to use the unseasoned funds.
It all comes down to the paper trail. Just like when you sell an asset or transfer funds from another investment account. If you can prove ownership of the funds for at least two months and that the transfer occurred from your own account into your checking account, you should be in good shape to use the unseasoned funds.
You should always check with your lender before transferring any funds, though. Don’t just assume they will allow the use of the funds. Ask before you act and you’ll increase your chances of approval. Some lenders may have other suggestions on how to manage the funds so that you don’t put your mortgage approval at risk.