In terms of mortgage preparation, it refers to the amount of time you’ve held funds in your bank account – specifically the amount ready to cover the down payment and closing costs.
What is mortgage preparation?
“Preparation” in relation to a mortgage refers to the length of time lenders require your funds to be in your bank account – specifically the funds that will cover the down payment and closing costs and other expenses up front. They want to see that you have cash (or significantly liquid assets) on hand for a specific duration – that the money didn’t suddenly appear out of nowhere before applying for a mortgage.
Preparation helps lenders confirm the borrower’s financial credibility, ensuring that the down payment funds come from legitimate sources. It’s a step that helps lenders avoid potential fraud from borrowers.
What are the mortgage preparation requirements?
Generally, lenders want to see that the money has been in an approved bank account for a period ranging from 60 to 90 days. If you’ve kept cash in your account for at least a few months prior to applying for a mortgage, that cash is considered prepared. Lenders will see that the money has been there for a long time and will regard it as legitimately yours. This also allows enough time for any new loans to appear on your credit report, helping the lender understand whether you borrowed those funds.
The specific preparation requirements – how long it takes to consider the funds prepared – can vary based on the type of loan you are applying for and your financial history.
Preparing the down payment
When obtaining a mortgage, most lenders have minimum down payment requirements that may depend on your credit score and the type of loan you are seeking. In recent years, lenders have increasingly required not only that you have the money to cover the down payment but that the down payment is also prepared. This means the funds must be in the borrower’s account for a specified amount of time, usually at least 60 days.
“The lender wants to see that the borrower did not acquire those down payment funds from a temporary or fraudulent source just to qualify for a loan,” says Jason Vanslette, an attorney and partner at Kelley Kronenberg in Fort Lauderdale, Florida.
To demonstrate that you are using your own money for the down payment, lenders will expect you to share your bank statements for the past two months, and if necessary, proof of the source of the funds.
“If those statements show a large deposit that is not from your paycheck, you must explain where the funds came from,” says Michelle Krupa, branch manager at Planet Home Lending in Wichita, Kansas. For example, if you sold some investments or borrowed money from your 401(k), you will want to provide financial statements documenting that you held those assets, liquidated them, and transferred the funds to your bank account.
Preparation after bankruptcy and foreclosure
Lenders also want to see good financial moves from you after bankruptcy or foreclosure before you can obtain another mortgage.
“The amount of preparation required varies from one lender to another, but as a general rule, you will not be considered for a loan until one year after a bankruptcy discharge or four years after a foreclosure,” says Bruce Aylion, an attorney, real estate agent, and investor based in Atlanta.
To get a mortgage after bankruptcy or foreclosure, you must meet the following minimum preparation periods:
Waiting period after bankruptcy:
4 years for Chapter 7 or Chapter 11 (2 years with exceptions); 2 years from discharge or 4 years from dismissal of Chapter 13
Waiting period for foreclosure:
Waiting period after foreclosure:
7 years; 3 years with exceptions
FHA Loan:
2 years for Chapter 7 or Chapter 11; 1 year for Chapter 13; 1 year with exceptions
VA Loan:
2 years for Chapter 7 or Chapter 11; 1 year with court approval for Chapter 13
USDA Loan:
3 years for Chapter 7; 1 year for Chapter 13
Many lenders require a waiting period of seven years after bankruptcy or foreclosure before they will lend to a borrower again. “But this can be shortened based on several factors, such as your credit scores before the foreclosure/bankruptcy, the credit you’ve built since the event, whether it’s a one-off event or not, and whether extraordinary circumstances have changed since the initial event,” says Vansleet.
Cash-out Refinance Preparation
You typically have to wait between six to 12 months to refinance your mortgage after closing the original loan, although there may be exceptions that apply.
“For lenders, the length of time you’ve been in repayment on the mortgage can be significant if you want to change the terms by refinancing or suddenly pull cash out,” says Vansleet, adding that the 12-month requirement generally applies to refinancing homes purchased through foreclosure or a short sale as well.
“For cash-out refinancing, the home must be owned for at least six months before any cash can be disbursed,” according to Michael Zofistowski, partner and manager at UHY LLP, an accounting firm in Albany, New York. “If the home has been on the market during the prior six-month period, the maximum loan-to-value ratio is 70 percent.”
If you’re looking to eliminate your private mortgage insurance by refinancing, you will need to have at least 20 percent equity in your property. “There are often preparation requirements estimated to be around two years before the owner can refinance to eliminate private mortgage insurance, although this varies from lender to lender,” says Zofistowski.
Overall, most owners refinancing do not have to deal with preparation issues, as very few of them try to restructure their mortgage payment or pull cash out within six months after closing the first loan.
Reverse Mortgage Preparation
If you’re interested in a reverse mortgage, lenders will closely examine the length of your residence in your home and your ability to prove that you will continue to live there as your primary residence.
“Many reverse mortgage lenders require some documented proof from you, such as utility bills for a covered period, ownership certificates, and other mail evidence indicating that you have used the property as your primary residence for the past year or more,” says Vansleet.
For a Home Equity Conversion Mortgage (HECM), which is backed by the federal government, there is a 12-month preparation period starting from the time of closing.
“Each lender can add additional preparation requirements, which will be disclosed as part of the purchase agreement,” says Zofistowski.
Why Do Lenders Require Preparation?
Preparation rules and requirements allow lenders to assess potential borrowers’ ability to obtain loans. Above all, it helps avoid borrowers who may attempt to engage in mortgage fraud or who may have obtained money for the down payment through illegal means. Preparation also helps lenders verify the financial stability of the borrower and reduce the risk of default. It indicates that you are a solid citizen, with the ability to save and the means to purchase a home for the long term.
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Thinking of preparing your loan as akin to aging wine; the longer the loan is prepared, the better the taste,” says Ailion. “The more payments you make on the loan or save for a down payment, the more qualified you become as a borrower.
Mortgage Seasoning Exceptions
Not all funds are subject to mortgage seasoning requirements. For instance, bonuses you receive from your employer and tax refunds do not have to adhere to the seasoning timeline. They can usually be used to cover the cost of a down payment right away.
Additionally, money gifted by relatives does not necessarily need to be seasoned. However, if the money shows up in your bank account less than 60 days before applying for a mortgage, you will need to provide documentation proving it’s a gift.
What to Do During the Seasoning Period?
Basically, seasoning means having the available funds to buy a home well in advance—enough to cover an approximate amount of your down payment, at least.
So you should transfer the funds to a savings account or cash account at the beginning of your home search journey. Start seasoning it while you submit a pre-approval application for a mortgage: the longer the cash stays in the account, the better you’ll look to lenders while shopping around for the best loan terms and rates. Let it continue to season while looking at listings and property tours. Don’t touch it, even if you’re tempted, for any other reason—that will ruin the seasoning concept. Try not to rack up any large new debts, take out other loans, or do anything else that could claim the money.
Ideally, by the time you make an offer to buy a home and formally apply for a mortgage, your funds will be fully seasoned (or very close). Perhaps it even earned you some interest (every little bit helps, right?). Then the lender can begin processing your loan, and you can get closer to becoming a homeowner.
Additional reporting by Mia Taylor
Source: https://www.aol.com/mortgage-seasoning-requirements-162911925.html
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