If you’ve applied for a home loan recently, you’ve probably already figured out that the mortgage industry is a lot more nitpicky then it used to be. Five years ago lending standards were super loose, now they’ve swung to the opposite extreme and are overly tight in many circumstances. It’s just not as easy to get a loan these days as it was a few years ago; not only are qualifications tougher, but the hoops you need to jump through to get the loan done have multiplied.
If you’re applying for a home loan where you need to come in with cash-to-close (as with a home purchase or refinance transaction where you’re paying down your loan at closing), plan on being asked to “source” and “season” the funds you’ll need to close. I highly recommend planning ahead for this because it can be a real headache to take care of at the last minute.
Sourcing and Seasoning Cash-to-Close Funds
The first requirement for cash-to-close is that the funds be “seasoned” for at least 60 days. In other words, the lender wants to make sure you aren’t obtaining cash from somewhere on a short-term basis simply to meet the cash-to-close requirements of the loan. To verify that you have “seasoned” funds, you’ll be asked to provide bank statements covering the last 60 days for all accounts you intend to use for your cash-to-close.
If you’re pulling cash out of an account that has some restrictions on withdrawals (such as 401ks, IRAs, etc.), you may be asked to provide the terms of withdrawal in writing as well.
One of the headaches that arises from bank statements is that the underwriter will likely require you to “source” any unidentified large deposits. Underwriters are concerned about such deposits because they want to make sure you aren’t pulling cash out of an unknown debt account that isn’t included in your debt-to-income ratio. Be prepared to provide cancelled checks or bank statements sourcing the deposits. If the deposits are transfers from another bank account, be prepared to provide the last two months of statements for that account and source any unidentified large deposits on those statements as well.
A Little Planning Ahead Can Help Simplify the Sourcing and Seasoning Process
Unexpected things often come up in the loan process, including low appraisals, property taxes coming due, etc., so it’s not always possible to anticipate cash-to-close issues ahead of time. However, if you’re going to be purchasing a home or refinancing and paying down the loan balance as part of the transaction, a little planning ahead can make the sourcing and seasoning part of your transaction much easier.
If you’re going to be coming in with cash at closing (purchasers, heads up!), I highly recommend pulling together the bank statements and sourcing documentation ahead of time so you’re not scrambling at the last minute before closing. Your loan consultant can help you determine what documentation is needed if you’re not sure.
If you’re still a few months from seeking mortgage financing, I highly recommend transferring the funds you’ll need to close a few months in advance into a single account that doesn’t have much deposit activity. This will help you cover the seasoning requirements as well as avoid sourcing headaches.
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