When you apply for a mortgage, lenders ask you a lot of questions not only about your credit and income, but your assets too. Basically, they want to know that any money you use for the loan is your money. Typically, this means money from income you made. But in some cases, it can also mean gift money.
Whatever the case may be for you, the money must be seasoned. Whether it’s seasoned in your bank account or the bank account of your donor, it must be in the account for at least 2 months. This is the lender’s way of making sure the funds aren’t sourced from some type of loan that could affect your ability to afford the mortgage payments moving forward.
Tracking Your Money
If there’s one thing you need for any loan, it’s a paper trail. Lenders need to know that your money didn’t come from any type of loan, whether from a bank or an individual. Typically, you can prove your funds with your paystubs. If the deposits match your paystubs, you are in the clear. What happens if you have large deposits, though? If they don’t coincide with your income, you’ll have to prove where they originated.
One way around this requirement, though, is to season the funds. In other words, let them sit in your bank account for 2 months. Your lender will likely only ask for the last 2 months of bank statements. If that money is there on both statements, you could be in the clear. 60 days is long enough for a lender to report a loan to the credit bureaus if the money originated from a loan. Using your credit report and the bank statements, together, a new lender can determine if there’s a loan out there that you didn’t report.
Seasoning Gift Funds
Gift funds often come right before you close on a loan. In fact, that’s when the lender wants you to receive them. How does that work with fund seasoning, though?
This is when the roles are reversed. Lenders still need to see that the funds are seasoned, but this time on the donor’s end, not your end. The lender knows you are going to receive a large lump sum of money to use towards the closing. What they want to know is that the donor didn’t take out some type of loan that you might owe in the future.
All the donor has to do is show proof of where the funds came from. For example, did he/she sell stocks to give you the money? Showing the proof of the sale of the asset is enough. Maybe the donor had the funds sitting in a money market account or even a savings account. Showing the lender two months of bank statements with the money sitting there is plenty of proof.
Lenders care about your assets’ seasoning only to make sure you don’t have any other liabilities out there. It makes sense since lenders need to protect their integrity. If you have another loan out there, you may find it difficult to make your mortgage payments in the future. If the lender doesn’t know about the loan, they won’t figure the payment into your debt ratio. This could mean that the lender loans you more money than you can actually afford. Requiring seasoned funds is one way around this issue and it’s one that works the best for most lenders.