The seasoning requirements to refinance a mortgage pertain to how long you have held your mortgage. The typical minimum time requirement to hold a mortgage before refinancing is one year, but there are many exceptions to this rule. Each mortgage program has their own requirements and each lender can have addition overlays for their own protection. This helps keep profits to a minimum that are not warranted.
How Seasoning Prevents Flipping
When a lender or mortgage program requires at least 12 months of seasoning, it prevents investors from purchasing a home for a low price and then selling it for an inflated price shortly down the road for a profit. This is common with the sale of foreclosures or short sales on the market. In addition, seasoning prevents investors from continually refinancing a mortgage on a home, taking out every penny of equity that exists and then letting the home go into foreclosure. When there is a required waiting period in between mortgage transactions, investors cannot take advantage of the equity in the home and then walk away from it, leaving it for the bank to sell.
Conventional Loans and Seasoning Requirements
Generally speaking, conventional loans do not have minimum seasoning requirements if you use a rate/term refinance. You can refinance the loan shortly after purchasing the home if you decide that is best. However, before you jump on the idea of refinancing, you should consider the implications of doing so. What are your reasons for refinancing? Will you save money? You should consider the closing costs involved in the transaction as they can take away from your savings. The lender will help you determine if you will save enough money to make refinancing right away worth it. The lender will want to know why you need to refinance so quickly after a purchase if it is within the first year. If you have a solid reason, it will your case.
The most common reason to refinance shortly after purchasing a home with conventional financing is to refinance a first and second loan into one loan. This is only possible if you used the second loan to purchase the home. If you used the funds for other purposes, such as to take cash out of the home or to consolidate debt, you cannot use the rate/term refinance. Any funds you did not use to purchase the home that you include in a refinance are a part of a cash-out transaction which has different guidelines.
Cash Out Conventional Refinance
A cash-out refinance has stricter rules in regards to refinancing with a conventional loan. You will have to own the home for at least six months before any funds can be disbursed on a new loan. In addition, if the home was for sale during the preceding six months, the maximum LTV you can get approved for is 70%. The home also must not be on the market when you go through the refinance process.
FHA Loans and Seasoning
FHA loans have slightly stricter seasoning requirements. These rules pertain to the FHA Streamline refinance. In this case, you must wait 6 months before you can refinance. This means you need to make at least 6 payments on time. The Streamline Refinance enables you to lower your interest rate and save money every month. You do not have to provide very many documents to qualify for this loan – the most important factor is that your mortgage payments were made on time. Everything else, including your income, credit, and the value of the home can be used from the original loan.
VA Loans and Seasoning
VA loans work much the same way as FHA loans when it comes to seasoning requirements. If you wish to take advantage of the VA IRRRL, Interest Rate Reduction Refinance Loan, you must wait at least six months before you can refinance. This gives the VA and the lender time to see that you can make your housing payments on time. This is the basic requirement to get approved for the VA IRRRL program, so it is important that you wait this length of time.
If you wish to take cash out of the home, technically, you do not have a seasoning period that you have to wait out. If you purchased the home recently, however, the original appraised value will be used – you cannot take advantage of any appreciation your area experienced. This helps to prevent borrowers from taking money out of an inflated value that might not stick in the long run.
Refinancing a mortgage is possible shortly after purchasing the home, but it is typically not in your best interest to do so. If you wait six months to a year, you can either gain sufficient equity in the home to make a refinance less risky or you can show the lender that you can afford the current payments. This helps any lender, whether it is for an FHA, VA, or conventional loan, see that a lower payment would be even less risky for them. Because refinances take time and money, the lender needs to make sure it is worth it to write another loan for you and that you are not a foreclosure risk for them in the near future.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.