Sourcing and Seasoning of Funds

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People sometimes ask, "Why should the lender care where I got the money for the down payment? I earned it, it's mine - cash is cash!"

They're right as far as they go. In general, the lender doesn't care whether you got your cash. It could have been by selling off your first-born child, moonlighting as a drug dealer, or embezzling the funds from your employer. It's not usually a good idea to get a real estate loan if you're facing criminal charges (and you must disclose it if you are), but if you aren't facing charges, the lenders don't really care.

What they do care about is money appearing for no known reason just prior to purchasing real estate. Quite often that money is an undisclosed loan, on which you are going to have to make payments, which are going to influence the debt to income ratio under which you qualified for the loan you want them to issue you. Debt to income ratio is the most critical measure of loan qualification. If you're going to be making payments of $400 to pay back the person who loaned you that money, the lender is required to consider whether the money you are making is going to enable you to pay back that loan as well as their own.

So the lender is going to want to know where any sudden influx of money in the last few months came from. This is called "sourcing" the money. They want to know where it came from. Did you sell another property? Then they want evidence, in the form of a HUD 1 that shows that money. Did you get a bonus? Let's see the remittance advisory. Did you sell stock? Did you sell your collection of rare Roman gold coins? Each of these has paperwork to attest to the fact, and the lender will want to see it.

If some friend or family member wants to make an actual gift, that's fine also. What the lender will require is a letter from that person stating that this money is a gift and comes with no strings attached. What they're looking for is an explanation that doesn't involve the money being obtained through a loan.

If you've had the money for a while, or have been building it up over time, your account statements will demonstrate that fact. Six months ago, you had $100,000. Since then, you've saved another $3000, earned another $5000, and your balance is now $108,000. This is called "seasoning" the funds. Nobody wants to have a loan sitting around longer than necessary - particularly not a loan for a significant amount of money. Seasoning the funds reassures the lender that this is not an undisclosed loan.

Suppose the money in your checking account that suddenly appeared two weeks ago is a loan? That isn't necessarily insurmountable. Let's get the loan paperwork out there where the lender can see it, examine the repayment schedule, figure out what it does to your ability to make the payments on this new real estate loan you want. If you qualify by debt to income ratio with these payments included, it's pretty likely your loan will be approved. There are exceptions, but I'm going to let those go uncovered, because I'm not real big on telling the general public how to get fraudulent loans accepted. There might be politicians reading this, and letting them know all the answers to that would be irresponsible of me.

The main reason why we have to source and season cash in every transaction is quite simply so people aren't able to hide the fact that they've recently gotten a loan. It seems paranoid at first, but it isn't paranoia if people are out to get you, and lenders have gotten burned many thousands of times over this point. People quite often don't even think it's wrong to keep silent, even though it is fraud. So if they don't require sourcing and seasoning of funds, the lender grants the loan based upon known information, only to later discover that the borrower is unable to make payments due to also needing to make payments on an undisclosed personal loan.

Caveat Emptor

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2 Comments

In the market in DC said:

Hello, I understand this, but I am trying to do a shared equity mortgage where my father will put money in for the down payment, and in exchange he will have equity in the property proportional to his share. If that is the case, it's not a loan, as his money is at risk as is mine. Problem is, I found an amazing opportunity and it's a short sale so needs to move fast, but 5 days after looking at it they the sales agent tells me about the seasoning requirement. Ugh! I don't want to do it as a gift as my father will be taxed on (most) of the amount. Is there a viable way to get around the seasoning requirement in this case? I am a first time homebuyer and this market downturn is the only thing that will get me into the home I want, in the location I want, at the price I want. If I wait 60 days, the opportunity I am looking at now will be gone. And it is a good one! Would appreciate your advice.

Dan Melson Author Profile Page said:

If it's a shared equity situation, you don't need to have the money sourced and seasoned in your account, providing it is sourced and seasoned in your father's. You're both going to be on title anyway.

Two further items: 1) Why in the bleep are you using the listing agent to help you buy? It's a conflict of interest and a recipe for disaster for you. 2) Short sales are not what you seem to think they are. Read my article "Why Buyers Should Avoid Short Sales" http://www.searchlightcrusade.net/2008/04/why_buyers_should_avoid_short.html

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About this Entry

This page contains a single entry by Dan Melson published on March 25, 2008 7:00 AM.

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