How Long to Keep Money in Your Account for a Home Loan

seasoning of funds for mortgage

When you’re preparing to buy a home, understanding the intricacies of mortgage approval is crucial. One important aspect that often confuses first-time homebuyers is the concept of “seasoning” funds in your bank account.

In this article, we’ll explore what seasoning means, why it’s important, and how long your money needs to stay in your account before you can use it toward purchasing a home.

What is Seasoning of Funds?

Seasoning refers to the period of time that your money must sit in your bank account before it can be considered valid by lenders. This requirement is designed to ensure that the funds used for the down payment and closing costs are stable, sourced, and not borrowed or a result of financial manipulation aimed at qualifying for a mortgage.

Why is Money Seasoning Important?

Lenders scrutinize your finances to reduce risk. Seasoned funds show financial stability and legitimate accumulation, which is vital for lenders in assessing your loan worthiness. This requirement helps prevent fraud and ensures that borrowers are financially prepared for the responsibilities of homeownership.

Typical Seasoning Requirements

The standard seasoning period for most lenders is around 60 days. This means that any large deposits into your bank account need to be fully explained if they were made within the last two months before applying for a loan.

Here’s how different types of funds are typically treated:

  • Regular Income: Paychecks and other regular income sources do not need seasoning if regularly deposited over time.
  • Large, One-Time Deposits: Large deposits need a paper trail. This could be a sale of an asset, a bonus from work, or a gift from a family member, and you might be required to produce documentation proving the source of the funds.
  • Gifts: Many homebuyers receive help from family. Gift money can be used, but it requires a gift letter from the donor stating that the money is not a loan and does not need to be repaid.

Exceptions and Variations

While 60 days is standard, some lenders or loan programs might have more stringent or lenient requirements. For instance:

  • FHA Loans: These loans are generally more flexible with the seasoning of funds, often requiring only a proper explanation and documentation of any unusual deposits.
  • VA Loans: Veterans Affairs loans might not strictly enforce seasoning rules but will require a thorough examination of your financial history.
  • Conventional Loans: These might follow the stricter side of seasoning requirements, especially if you’re putting down a smaller down payment.

Tips for Managing Your Bank Accounts Pre-Loan Application

Avoid Unnecessary Large Deposits: Try to keep your bank account as stable as possible in the months leading up to your mortgage application.

Document Everything: For any large deposits, keep thorough records and documentation. You’ll need to prove where each deposit came from.

Communicate with Your Lender: Understanding your lender’s specific requirements can save you from many headaches. Early communication can help ensure you meet all necessary criteria.

Key Takeaways

Seasoning your funds is just one part of preparing for a successful home loan application, but it’s a crucial one. By understanding how your financial behavior affects your loan approval and planning accordingly, you can smooth the path towards your new home with fewer surprises. Always consult with your lender for the most specific guidance related to your situation.

Are you in need of a Colorado Springs home loan? Please feel free to contact us to get pre-approved for a mortgage.