Summary: Many mortgage lenders today require down-payment funds to be sourced and seasoned. Sourcing is basically identifying where the money came from. Seasoning means the money has been in the bank for a certain period of time, such as 60 days or more. Here’s what you need to know about these common requirements.
The mortgage industry is a lot more picky than it used to be. You probably know the reasons for this. File it under ‘M’ for mortgage meltdown. During the housing boom, lenders didn’t much care how borrowers came up with their down-payment funds — as long as they had them. But a lot has changed since then. Today, lenders want borrowers to source and season their funds, to the full extent possible.
What Are Sourced and Seasoned Down-Payment Funds?
Sourced — Funds that are ‘sourced’ can be traced back to their origin. When an underwriter sources the money to be used for a down payment, he is determining where it came from. Did the money come from the borrower’s regular income stream? Did it come from a 401k withdrawal? A gift from a family member? The proceeds of a previous home sale? Or did it “magically” appear out of nowhere? The lender will want to know this. That is the reason for sourcing.
Seasoned — Funds that are ‘seasoned’ have been in the borrower’s bank account for a certain period of time. The general rule is 60 days, but it can vary from one lender to the next. Some require at least 90 days of seasoning. This is why people who save money at home often face more obstacles when applying for a mortgage — their savings haven’t been seasoned.
Why Do Lenders Care About Sourcing & Seasoning?
Why do lenders prefer ‘seasoned’ funds? According to Mark Fitzpatrick, a mortgage consultant with WesLend Financial in Irvine, California: “the lender wants to make sure you aren’t obtaining cash from somewhere on a short-term basis simply to meet the cash-to-close requirements of the loan.”
In other words, they want to see that you’ve saved up the money for your down payment by being a responsible consumer, and not through last-minute borrowing.
A general rule of thumb is that the assets in your bank account should be at least 60 days “old” at the time you close. But this is not a hard and fast rule. Some lenders are more flexible and allow 30 days of seasoning, while others have a 90-day preference. It varies.
So that covers the seasoned side of things. But what about sourcing? Why does the money used for a down payment have to be sourced? Basically, lenders want to know where the funds came from. If the money came from your regular income or savings, you have nothing to worry about. If it came from some short-term funding source, such as a cash advance, you might have some explaining to do.
According to Justin Sheftell, Director of Sales with Courtesy Mortgage, “mostly [lenders] are looking for any unusual deposits that do not originate from the sources of income on your application.”
So if you have a sudden and significantly large deposit outside of your normal banking patterns, you will probably have to provide a written explanation of where the money came from. As Ricky Ricardo used to say, “You got some splaining to do.”
If you withdraw cash from an investment or retirement account (like a 401k or an IRA) that has certain restrictions on withdrawals, the underwriter will likely ask to see the terms of the withdrawal in writing.
Using Bank Statements for Verification
Mortgage lenders request bank statements to ensure the money being used for the down payment is coming from an “allowable source.” The definition of an allowable source will vary from one lender to the next, and also based on the type of loan you are using.
Earlier, I mentioned receiving a down-payment gift from a family member. This might be permissible in some cases, but the lender will want to source the gift to find out who it came from. They may have a rule, for example, that limits such gifts to family members only, and excludes non-family donors. This is one of several reasons they will ask to see your bank statements and other sourcing documents.
When reviewing your bank statements, the underwriter will also keep an eye out for any unidentified large deposits. These are deposits that do not come from your regular sources of income. The underwriter will likely ask you to source them by providing documentation and/or a written statement as to their origin. They want to make sure you’re not using money from an unknown account outside of your current debt-to-income (DTI) calculation. In this scenario, the deposit can be sourced with canceled checks, bank statements, or other documents that show the origin of the funds.
Making Things Go Smoothly
So what can you do, as a borrower, to avoid headaches with sourced and seasoned down-payment funds?
- Long term: If you’re at least a few months away from applying for a mortgage, you could start putting your down payment and closing-cost funds into a separate bank account — ideally one that doesn’t have a lot of deposit activity. This will take care of the standard seasoning requirements and will also make it easier to source the funds (that is, to trace them back to their origin).
- Short term: If you plan to apply for a mortgage loan soon, you can start rounding up your bank statements and other asset-related documents. Ask your lender what kind of information the underwriter will need to source and season your down-payment money, and start gathering those items immediately. It could help you avoid delays during the underwriting process.
Be proactive. Be your own advocate. But don’t panic. If you have sufficient assets to qualify for a home loan, and you have nothing to hide, there’s probably nothing to worry about. According to Jim Woodworth, a mortgage specialist with Quicken Loans: “As long as the assets can be documented, you’re generally in the clear.”
Disclaimers: This article explains sourced and seasoned funds, as they apply to down payments on mortgage loans. It’s important to note that documentation requirements vary from one lender to the next. They also vary depending on the type of loan you are using (FHA vs. conventional, etc.). Some lenders have rigid requirements for sourcing and seasoning, while others are more flexible with their criteria. So be sure to ask about it up front, when you first apply for the loan. Every lending scenario is different. You may encounter certain requirements that are not mentioned above. This article is a general guide to sourced and seasoned down payments, and should not be viewed as financial advice.