How the ‘Seasoning" Rule Can Stop Your Home Purchase

“But I have the down payment. The money is right there in my bank account. Isn’t that good enough?” I could hear the shock in the home buyer’s voice as he handed me his bank account printout. He’d been saving money for a house for six months, diligently putting cash away in his safe at home 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 his bank printout in to show me that he now had the money saved up, only to be met with a less-than-pleased reaction from me, his mortgage lender.

And what could I say to him? Yes, you saved the money and yes, you have it in the bank, but no no no no no – I’m so sorry, but that’s not good 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’re buying a home, your lender needs to not only know that you have the money to buy it, they also need to know where that money came from. With FHA loans the money can be a gift from a donor that is acceptable to FHA, but with conventional loans, the down payment needs to come from your own funds, at least for the first 5% down.

For money to count as ‘your own funds’, they need to be your accumulated savings from your earnings or proceeds from a secured loan, like a 401k loan, a 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 like it doesn’t exist and will not let you use it to purchase your home.

How Will A Bank Know If It’s A Buyer’s ‘own funds’?

That’s where 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 views it as having been there long enough to be yours. After two months in your account, the money is considered ‘seasoned’ and eligible for use in your home purchase.

If your money hasn’t been in your account for two full months but the bank can see that it has accumulated in your account through your payroll, that is acceptable too. The problem comes up when the money just appears in your account in the last 60 days and it didn’t come from a source that is acceptable 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. Had my buyer been saving his money in the bank all along instead of as cash at home, things would have been fine. It was the recent deposit of it that created the problem. Buyers and their lenders need to talk to each other early on about the source of the down payment so that the lender can make sure the buyer is saving properly.

If the buyer has been saving at home all along before meeting with the lender and now it’s too late to go back and change that, though, there are typically two ways to work around this. The first route is to try to document the money. If the buyer can show that he gets paid $600 each week and has taken back $200 of it in cash week-in and week-out for the last 6 months, the loan underwriter might be willing to view this as a savings pattern that matches the cash on hand. Sometimes some of the cash comes from other sources, like garage sales or the sale of personal property. Documenting as much of that as one can (ie copy of Craigslist post for sold items, bill of sale from buyer, etc.) combined with a letter explaining it can help sometimes.

A second route is to live off of the cash for the time being and let all payroll earnings go into the bank to accumulate that money in an acceptable manner. This may delay the home purchase by a month or so, depending on how quickly the payroll income can accumulate, but it can be a solution in many situations.

The best way to fix a problem like this, though, is to just avoid it. Meeting with your lender a couple of months before you intend to buy a house is an excellent step to help you avoid making unintended mistakes that could impact your ability to get a mortgage when you’re ready to buy your home.