Lenders operate on risk. The lower their risk, the less they charge in interest and fees.
And one way they analyze risk is by looking at your financial stability. Enter: seasoning requirements.
Lenders include these time requirements to make sure that you don’t just qualify for a mortgage as a fluke this month, but rather show a history of creditworthiness. As you shop for a home loan, keep mortgage seasoning requirements in mind.
What Are Mortgage Seasoning Requirements?
Lenders like to see that you’ve been “fit to borrow” for as long as possible. A history of creditworthiness demonstrates that you have the stability to make payments in full and on time, not just at this exact moment but always.
Mortgage lenders want to see that you qualify for a loan program, both right now and for a while. The longer, the better. So, they set minimum standards for how long you’ve met certain borrower requirements.
For example, to qualify for a loan, you must prove that you have the cash for a down payment, closing costs, and often the first six months’ mortgage payments. But lenders look at not just how much money you have in your savings account, but also how long you’ve had it.
Beyond cash seasoning requirements, lenders also look at whether you’ve ever declared bankruptcy, lost a home to foreclosure or short sale, or refinanced. Having done so doesn’t prevent you from getting a loan — as long as enough time has passed.
What Is the Purpose of Mortgage Seasoning?
Look at it this way: would you want to lend money to someone who just got discharged from bankruptcy last week? Or who never has any cash on hand, but who deposited thousands of dollars in their account yesterday that they can’t explain?
No — you’d want to see a track record of responsible behavior before you opened your wallet. That ‘s why mortgage lenders look at not just the snapshot of you today, but also how long you’ve qualified as a borrower.
Types of Seasoning Requirements
Mortgage lenders impose several types of seasoning requirements, depending on the loan program. These requirements vary greatly, so discuss your circumstances openly with your loan officer to find a loan program that fits your needs if you’ve only recently qualified for a loan.
When you apply for a mortgage, the loan officer asks for your most recent two or three months’ bank statements in the first round of document requests.
Yes, they want to make sure you have the cash you need for a down payment and closing costs. But they also want to start looking at the paper trail for your down payment funds. If you went from a $2.50 balance to a $25,000 balance overnight, they know it will raise red flags with their underwriting department, so they want to get out in front of the question and find out your story now.
Most lenders like to see adequate funds in your bank account for at least the past two months. If they see a sudden influx of money that doesn’t look like it came from your regular income, expect them to ask you about it.
Note that conventional loans don’t generally allow any part of the down payment to be borrowed. You can accept a gift from a friend or family member, but not a loan, to cover the down payment. You’ll need to submit a signed letter from your benefactor if you accepted a gift to cover part of your down payment.
As a final note, some borrowers get around gift or loan rules by accepting the funds more than two months before applying for a loan. That way, they appear seasoned to lenders. But if lenders ask for earlier bank statements, they might spot the sudden influx of cash and start asking questions.
Bankruptcy and Foreclosure Seasoning
Declaring bankruptcy or going through foreclosure doesn’t prevent you from ever taking out a mortgage again. But it does bar you from borrowing a mortgage again for a while, usually two to four years for bankruptcies and up to seven years for foreclosures.
Each type of mortgage comes with its own rules for how recently you can have emerged from bankruptcy or foreclosure. Disclose it if you have one on your record, because the lender will see it on your credit report regardless. Ask about more forgiving loan programs that allow a more recent bankruptcy or foreclosure if you have one within the past few years.
Lenders allow a slew of exceptions to these seasoning requirements as well, so ask about allowed exceptions before assuming you can’t move forward. Beware that the loan will likely take longer to go through underwriting and will involve more hoops and paperwork than usual.
It raises lenders’ eyebrows if you just took out a mortgage loan a few months ago, and then come back asking to refinance already.
To begin with, lenders like to see a track record of on-time mortgage payments before they refinance you at the best interest rates. Expect a required mortgage seasoning period of six to 12 months before lenders allow you to refinance.
If you want to refinance an FHA loan to get rid of the private mortgage insurance (PMI) premium, most loan programs require two years of seasoning. Plus you can only borrow up to 80% of the property value (80% loan-to-value ratio, or LTV) if you want to avoid PMI, and it takes time to build that kind of home equity.
Lenders do make an exception for renovations however. If you buy a fixer-upper, whether as a homeowner or an investor with a hard money loan, you can refinance for a new mortgage after completing the renovations.
Cash-Out Refinance Seasoning
While mortgage lenders love to refinance you after you’ve built a little equity, don’t expect them to jump at the chance if you come asking for cash out within the first six to 12 months of owning a home. Or, for that matter, within a year of another cash-out refinance.
It smacks of desperation, which flies a red flag that you aren’t financially stable. Refinancing costs you thousands of dollars in closing costs, extends your debt horizon, and restarts your amortization schedule from scratch (resetting your payments to be mostly interest rather than going towards principal).
As a general rule you should avoid refinancing entirely unless you have a compelling reason, such as an opportunity to qualify for a much better interest rate.
Again, it takes time to build equity in your home. Lenders are more than happy to let you pull equity from your home — once you’ve built some.
Reverse Mortgage Seasoning
When you take out a Home Equity Conversion Mortgage (HECM), the most common reverse mortgage program, the Department of Housing and Urban Development (HUD) imposes a seasoning requirement of one year for any other existing liens. Expect a similar reverse mortgage seasoning requirement for other types of reverse mortgages.
Lenders also require you to have lived in the property as your primary residence for at least 12 months as well before taking out a reverse mortgage.
Exceptions to Mortgage Seasoning
If you accept a gift from a friend or relative to help cover the down payment or closing costs, the funds don’t have to be seasoned in your bank account.
Refinance seasoning requirements also don’t apply if you inherit the property. Similarly, if a divorce court awards you the property, refinance seasoning limits don’t apply.
As touched on above, refinance seasoning similarly doesn’t apply for renovated properties. If you have majority ownership of an LLC-owned property and transfer it to yourself, the waiting period likewise doesn’t apply.
Seasoning requirements don’t generally apply to investment property mortgages, either.
Lenders put time requirements on your cash, on how long you’ve had a mortgage, and on how long you have to wait after a bankruptcy or foreclosure before you can take out a new loan. They put these rules in place to protect against high-risk real estate loans.
While seasoning requirements still apply to borrowers with high credit scores, lenders do have some flexibility in working with you. The better your credit, the lower your perceived risk, and the better the odds that lenders will work with you.
Borrowers most commonly bump up against seasoning issues for their down payment. If you want to buy a home but worry that you don’t have enough cash in your checking account, look up creative ways to cover a down payment. In some cases, you don’t need to park the money in your bank account for at least two months before applying for a loan.
Finally, don’t be afraid to pick up the phone and have an informal conversation with a loan officer or two. Paid on commission, loan officers want to close your loan, so they’ll talk you through all the seasoning requirements that might affect you, and offer ideas to make your loan happen.