“But I have the down payment. The money is there in my bank account. Isn’t that enough?” I could hear the shock in the voice of the home buyer when he handed me the hard copy of his bank account. He had been saving money for a home for six months, diligently putting cash in his home safe every week until yesterday, when he took $ 5,000 of his hard-earned savings to his bank and deposited it into his account. Today he proudly brought the printout from his bank to show me that he now had the money saved, only to be met with an unpleasant reaction from me, his mortgage lender.
And what could I say? Yes, he kept the money and yes, he has it in the bank, but no no no no no, I’m very sorry, but that’s not enough. Unfortunately, my buyer was about to learn a hard lesson about the importance of “seasoning.”
Isn’t all money the same?
No, it’s not. When you buy a home, your lender doesn’t just need to know that you have the money to buy it, they need to know too where did that money come from. With FHA loans, the money can be a gift from a donor that is acceptable to the FHA, but with conventional loans, the down payment must come from your own funds, at least for the first 5% down.
For the money to count as ‘your own funds’, it must be your accumulated savings from your earnings or the income from a secured loan, such as a 401k loan, car loan, or something similar. Money that is not from an acceptable source will be a problem, and your lender will have to treat that money as if it does not exist and will not allow you to use it to buy your home.
How will a bank know if it is a buyer’s “equity”?
That’s where the seasoning comes in. Seasoning refers to how long the money has been in your bank account. If you’ve had money in your bank account for at least two months, the bank considers it to be there long enough to be yours. After two months in your account, the money is considered “seasoned” and eligible to use toward the purchase of your home.
If your money has not been in your account for a full two months, but the bank can see that it has accumulated in your account through your payroll, that is also acceptable. The problem arises when money appears in your account in the last 60 days and does not come from an acceptable source for mortgage approval.
So what does a buyer do when this happens?
The best way to deal with this type of problem is to never have it happen in the first place. If my buyer had been keeping his money in the bank all the time instead of cash at home, things would have been fine. It was your recent deposit that created the problem. Buyers and their lenders should discuss the source of the down payment with each other up front so the lender can ensure that the buyer is saving appropriately.
If the buyer has been saving at home the entire time before meeting with the lender and now it is too late to go back and change that, there are usually two ways to fix this problem. The first route is to try to document the money. If the buyer can show that they are paid $ 600 each week and have recovered $ 200 in cash week after week for the past 6 months, the loan underwriter might be willing to see this as a pattern of savings that matches the available cash. Sometimes some of the cash comes from other sources, such as yard sales or the sale of personal property. Documenting as much as possible (i.e. a copy of the Craigslist post for the items sold, the buyer’s bill of sale, etc.) combined with a letter explaining this can help at times.
A second route is to live off cash for the moment and let all payroll proceeds go to the bank to accumulate that money in an acceptable way. This can delay your home purchase by about a month, depending on how quickly your payroll income accumulates, but it can be a solution in many situations.
However, the best way to fix a problem like this is to simply avoid it. Meeting with your lender a couple of months before you intend to buy a home is an excellent step to help you avoid making unintentional mistakes that could affect your ability to obtain a mortgage when you are ready to buy your home.