Buying a house is a huge milestone, and securing a mortgage is often a crucial step in the process. But before you can get the keys to your dream home, there’s one important hurdle you need to clear: sourcing your funds.
This might sound like a technical term, but it’s actually quite simple. Sourcing your funds simply means proving to your lender where the money for your down payment and closing costs is coming from. This is essential for a few key reasons:
1. Preventing Fraud:
Lenders want to make sure that you haven’t used any illicit means to obtain the funds for your mortgage. They are able to reduce the possibility of fraud and shield themselves from possible losses by confirming the source of your funds.
2. Assessing Your Financial Stability:
Sourcing your funds allows lenders to evaluate your financial situation and determine your ability to repay the loan. By seeing that you’ve saved the money yourself, they gain confidence in your financial responsibility and commitment to the mortgage
3. Avoiding Risk:
If your down payment suddenly appears out of thin air, it raises red flags for lenders. They need to be sure that the money is legitimate and not borrowed from someone else, which could put you at risk of defaulting on the loan.
So what does “seasoning” your funds mean?
“Seasoning” in the context of mortgages describes how long your money has been sitting in your bank account. Your down payment and closing costs must be seasoned for at least 60 to 90 days, according to most lenders. By doing this, they can confirm that the funds are actually yours and haven’t been recently deposited from an unidentified source.
Exceptions to the Seasoning Rule:
There are a few exceptions to the seasoning rule. For instance, funds received as bonuses from your employer or tax refunds don’t typically need to be seasoned. Additionally, gifts from family members may not require seasoning, but you’ll need to provide documentation to prove that it was a legitimate gift and not a loan.
Tips for Seasoning Your Funds:
- Start early: The sooner you start saving for your down payment, the more time your funds will have to season.
- Keep your money in a stable account: Avoid moving your funds around frequently, as this can raise questions about the source of the money.
- Document large deposits: If you receive a large deposit from a source other than your regular income, be sure to document the source of the funds.
- Be prepared to answer questions: Your lender may ask you about the source of your funds, so be prepared to provide them with clear and concise answers.
When you follow these guidelines and realize how important it is to source your funds, you can make sure that your mortgage process goes smoothly and successfully as you work toward becoming a homeowner.
Regular payments, irregular activities
Monthly payments on bank statements that don’t match a credit account that you disclosed on your mortgage application are another item to be wary of.
Typically, your credit report will pull in your credit cards, auto loans, student loans, and other debt accounts. But some creditors don’t report to the major credit bureaus, such as Equifax or Experian.
For example, the debt details associated with a private, personal, or business loan obtained from an individual rather than a financial institution might not show up on your credit report.
But your bank statement’s automatic $300 monthly payment will probably notify the lender that you have a credit account that isn’t disclosed.
What do underwriters look for on your bank statements?
Your bank statements will be examined by the underwriter, who assesses and approves mortgage applications, for four main reasons:
- Sufficient funds in reserve for the down payment and closing charges
- The source of your down payment, which has to meet the requirements set forth by the lender
- Enough cash flow or savings to make monthly mortgage payments
- Extra money set aside for emergencies is known as a cash reserve.
Generally speaking, an underwriter wants to make sure that the money in your bank accounts is yours and wasn’t borrowed (unless it was through a gift of a properly documented down payment).
In other words, any funds used to qualify for the mortgage need to be “sourced and seasoned.”
- “Sourced” refers to a situation in which the source of the funds is evident and any unexpected deposits are documented. Again, large deposits still may require an explanation.
- Usually, “SEASONED” indicates that the funds have been in your account for a minimum of sixty days. The money ought to appear on the two months’ worth of bank statements that you have to submit.
Bank statements additionally demonstrate to underwriters that prior to obtaining the mortgage, you had not opened any credit accounts or taken on any new debt.
Acceptable Sources of Down Payment Funds when Buying a House
FAQ
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