What Are Seasoned Funds For Your Down Payment?
Are you almost ready to buy a turnkey rental property? One of the first things you’ll need to do is get a down payment together and then acquire financing. But even before that, you need to make sure your down payment funds have been seasoned. If you’ve never purchased real estate before, you may be unfamiliar with the term “seasoned funds.” In fact, you may never know what seasoned funds are unless your loan application is denied because of it. But if that ever happens, you’ll wish you had known ahead of time about this lender requirement.
What Are Seasoned Funds?
Seasoned funds are money that’s been in your possession for a minimum of 60 days. Despite misinformation to the contrary, the money doesn’t have to be sitting in your bank account all that time. It just needs to have been in your possession for that length of time. For example, it could be in your pension fund, your stock brokerage account, or even in your Paypal account. You just need to be able to prove that the money was in your possession 60 days before you hand over your down payment money.
Lenders will look at your financial statements for the previous two months in order to verify that the funds are seasoned. So if you’ve transferred money out of another investment fund for the down payment, you’ll need to provide the last two months’ worth of that investment fund’s statements to the lender, even if they don’t specifically ask for it. Remember that a lender will presume the seasoned funds came out of a bank account. If yours don’t, you can save time and trouble by acting preemptively and supplying the necessary statements ahead of their turning you down for not having seasoned the funds.
Why Do Funds Need to be Seasoned?
The government has put in place a number of precautionary measures to prevent nefarious activity around money. However, this doesn’t mean that they are actively looking for money launderers or criminals. Requiring seasoned funds is just a preventive measure to make it harder for certain kinds of individuals to use ill-gotten gains for profit. That’s one reason why funds need to be seasoned.
The second reason why funds need to be seasoned has to do with protecting the lenders’ interests. Lenders need to be sure that you are able to come up with the down payment without taking out a loan for it. If you were to borrow your down payment money, that alters your debt-to-income ratio, which might make you ineligible for the mortgage loan you applied for. Also, if all or part of the down payment money came from a second lender, that second lender would technically be able to lay claim on the property should you allow your loan to go into default.
These are reasonable explanations for why property buyers need to season down payment funds for a minimum of 60 days. Even so, sometimes you don’t need to season funds. Following are some exceptions to the rule.
When Your Funds Don’t Need to be Seasoned
There are a few situations when your down payment doesn’t need to be seasoned. It’s always best to season the funds no matter what, but in the following situations your lender may make an exception:
Your Loan Type Allows Gifts
If you applied for a loan that specifically allows part of the down payment to be gifted to you, that money doesn’t need to be seasoned. Not all loans have this exclusion, so be certain what the rules are before accepting a down payment gift from anyone. And, if you are using gifted money as a down payment, let the giver know that they may need to provide your lender with a paper trail showing where that money came from.
Recurring Paycheck Deposits
Most people save up money for a down payment over time; socking away a percentage of each paycheck into a savings account. If this describes your savings habit, you don’t have to worry about the seasoning requirement. In other words, you don’t have to sit and wait an additional 60 days after you’ve made your last savings deposit from your paycheck. A lender will be able to tell from your bank statements that you’ve established a pattern of savings and that there’s a clear record of where each deposit came from.
If you have a retirement fund such as a 401(k) and you’d like to use some or all of that money for your down payment, you won’t need to concern yourself with the seasoning period, either. This is because the money has already been in your possession; you’re basically just transferring it to a personal account in order to put a down payment on a turnkey rental property.
Other Things to Know About Seasoned Funds
Most lenders have a 60-day minimum on seasoned funds, but you should know that some lenders have a 90-day minimum. You can easily find out what your lender’s requirements are well ahead of time simply by speaking to one of their loan officers.
Other lenders only have a 30-day seasoning period. This is less common, but it does exist. Again, speak to your loan officer for details so you know exactly where you stand.
Hidden cash in your home could be problematic as far as using it for a down payment. If you’re the kind of person who feels safer tucking your money away outside of an institution, you may encounter problems getting a loan. Be proactive and get your “mattress money” into a financial institution as soon as possible after you decide to purchase a property. As long as you meet the minimum seasoning length of time, you’ll probably be okay, but don’t wait until the last minute.
At MartelTurnkey, we’ve seen too many would-be investors get disqualified because their money wasn’t seasoned. Don’t let this happen to you. Otherwise, you could miss out on a great turnkey rental property that you had your eye on. We always have more turnkey rentals in the pipeline, but we hate to see investors disappointed. If you need help figuring out financing and learning how long your down payment funds need to be seasoned, don’t hesitate to contact us. We’re always happy to help.