Does the FHA Require Seasoned Funds for Down Payment and Closing Costs?

You can buy a home with FHA financing with as little as 3.5% down on the home plus the cost of closing costs. If you plan to use your own money for these costs, rather than gift money, you’ll have to prove that the money is yours.

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The FHA calls this ‘seasoned funds.’ In other words, you have the money sitting in your own account for a certain period of time. Luckily, for this loan program, the seasoning requirements are fairly flexible, just like everything else in this loan program.

Typical Seasoning Requirements for Down Payment Funds

In general, the FHA requires proof that money in your checking or savings account has been there for at least the last 3 months. You prove this with the last two bank statements you received. The lender will look over the statements to make sure there were not any large deposits during that time and that the balance is greater than or equal to the amount you plan to put down on the home and/or use for closing costs.

If there are any deposits that exceed 2% of the sales price of the home, the lender must inquire about them. The lender may then require a written explanation regarding the origination of the funds as well as documentation proving the fund’s origination. For example, if you sold an asset, the bill of sale plus a letter explaining the sale will suffice.

If your funds come from any type of account outside of checking or savings, the lender will require the most recent (typically a quarterly) investment statement. The statement should show the full value of the account as of the date of the statement.

Using Cash for the Down Payment and Closing Costs

FHA requirements are more flexible than other requirements and it shows in their acceptance of the use of cash for a down payment or to pay closing costs. The lender must obtain a written explanation from you regarding how you saved the cash, including the time it took to save that amount. Based on the time you state it took to save the funds and your normal income, savings, and spending patterns, the lender can determine if the amount of cash you have is viable given your circumstances.

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Keep in mind, these requirements are the requirements of the FHA, not the lender. You may find that some lenders won’t accept cash as an acceptable source of funds. It’s best to ask around before applying. Being honest with each lender about your situation will help you get the answers you need.

Don’t Forget About Earnest Money and the Seasoned Funds Requirement

If your seller requires an earnest money deposit, the FHA has rules regarding that too. If the earnest money deposit exceeds 2% of the sales price, you will have to follow the FHA guidelines to ensure that they are seasoned funds. So for example, if you buy a home for $200,000 and you have to put down $5,000, you would have to follow the following rules:

  • Proof of the origination of the funds, similar to the rules regarding the down payment
  • Proof of the cancelled earnest money check
  • Proof of receipt of the funds from the escrow agent

Again, your funds should be in your account for at least 3 months before you use them as earnest money. If your money was in the account for less time than this, you’ll have to provide a written explanation of the source along with ample evidence of its origination.

The bottom line is that the FHA wants to make sure your funds are not an additional debt. For example, if a friend lent you money or you took out a personal loan, it affects your debt ratio. They are not your own funds to use at your own free will – they come at a cost. That cost could make the difference between a mortgage approval and denial. Make sure you take the time to source your deposits and ensure that you have enough money for the earnest money, down payment, and closing costs before starting the process. If you have questions about seasoned funds, make sure you ask your lender.

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Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.

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