In this blog, we will discuss and cover cash to close and seasoned funds for closing on a home purchase. Many borrowers have a hard time understanding cash to close for closing. Most folks and the regular traditional business world would think that cash is definitely king when it come to purchasing any consumer goods and even high ticket items including a home.
Undocumented and Unverified Funds Cannot Be Used In A Mortgage Transaction
Unfortunately, undocumented funds and cash on hand are not allowed when qualifying for a mortgage loan. Seasoned Funds for closing all need to be documented. Loan officers and mortgage processors need to make sure that the borrower has enough cash to close for closing in the earlier stages of the mortgage process.
Cannot wait until the last minute, especially if the borrower does not have any family members that can gift them the money. In this article, we will cover cash to close as well as seasoned funds required for a home closing.
How Lenders Source And Determine Cash To Close And Seasoned Funds For Closing
As mentioned earlier, all funds in the mortgage transaction processed will require documentation as of where the funds came from.
For example, here is a case scenario:
- if the borrower is getting a $1,000 direct deposit every other week from his employer
- These will be considered verified funds
- these funds can be used for cash to close and seasoned funds for closing
However, if a borrower were to deposit cash from his side job, those funds cannot be used for cash to close and seasoned funds for closing:
- Cash in the mortgage business cannot be used as verified funds
- Any irregular deposits that are over $100 dollars needs to be explained and the source of the deposit needs to be provided to the mortgage underwriter
Case Scenario of Irregular Undocumented Deposit
For example, here is a case scenario:
- if there as an irregular deposit of $2,000
- the underwriter will need to know where that money came from
- If it came from an income tax refund, then documentation from the IRS and deposit slip
A letter of explanation needs to be provided in order for that $2,000 deposit to be able to be used for cash to close and seasoned funds for closing.
How Long Do Funds Need To Be Sourced?
There are instances where borrowers cannot source their deposits and this creates a big problem. The good news is that borrowers who have substantial cash deposits and cannot be sourced and cannot be used for cash to close and seasoned funds for closing can wait 60 days from the date of their last unsourced deposit and underwriters will not question it.
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What Does it Mean for Funds to be Seasoned?
In mortgage and real estate, “seasoned funds” typically refer to funds in a borrower’s bank account for a certain period, usually two or more months. Lenders often require borrowers to provide documentation showing the sources of their down payment and closing costs for a mortgage loan.
Lenders prefer seasoned funds because they demonstrate stability and reduce the risk of fraud. Suppose funds have been in an account for a significant period. In that case, it suggests that they are not borrowed or obtained through questionable means, making the borrower a more reliable candidate for a mortgage loan.
Seasoned funds can come from various sources, such as savings, investment accounts, or gifts. Still, they must be documented to ensure compliance with lending regulations and verify the borrower’s ability to afford the mortgage payments.
What Does a Seasoned Loan Mean?
In lending, a seasoned loan refers to an active loan for a specific period, typically ranging from a few months to a few years, during which the borrower has consistently made timely payments. This payment history demonstrates the borrower’s ability to manage and repay debt according to the terms outlined in the loan agreement. Lenders often view seasoned loans more favorably due to their reduced risk.
For instance, in the mortgage industry, a seasoned mortgage loan has been maintained for at least six months to a year with regular payments made by the borrower. Such loans are valuable for lenders as they provide a reliable indication of the borrower’s creditworthiness and financial stability.
Additionally, seasoned loans may benefit borrowers, such as eligibility for refinancing at lower interest rates or with improved terms. Moreover, seasoned loans are often bundled together and sold as mortgage-backed securities in the secondary market, attracting investors due to their established payment history and reduced risk of default.
Overall, the seasoning of a loan signifies a period of stability and responsible borrowing behavior, benefiting both borrowers and lenders alike.
How Do Mortgage Underwriters Analyze 60 Days Bank Statements
Lenders require 60 days of bank statements and only the transactions from the 60 days of their bank statements are scrutinized. Anything prior to the 60 days is not questioned and are considered verified sourced funds and can be used for cash to close and seasoned funds for closing.
There are still folks who do not trust banks and have cash in a safe deposit box at their local bank or cash on hand in their homes. Unfortunately, cash cannot be used as verified sourced funds. So the only solution is to make the cash deposit in their bank account and wait 60 days for the funds to seasoned in order for those funds to be counted as verified funds.
What Are Large Deposits?
Under the view of lenders, large deposits are deposits that are equal to or greater than 10% of the monthly gross household income of the borrower. Large deposits need to be sourced to be able to be used for cash to close and seasoned funds for closing. Those who are planning on buying a home in the near future, deposit any and all unsourced funds and cash as soon as possible and let those funds season 60 days in the bank account. So sourcing those deposits will not become an issue when you are ready to apply for a mortgage loan.
Gift Funds As Cash To Close And Seasoned Funds For Closing
Gift Funds can be used for cash to close and seasoned funds for closing. The donor needs to sign a gift letter provided by the lender which states that the funds gifted to the home buyers is a gift and not a loan and that the gift funds will not be paid back to the donor.
The borrower needs to make a copy of the check received by the donor and provide copies of the deposit slip as well as an updated bank statement after the deposit of the check from the donor of the gift funds. The donor needs to provide 30 days of bank statements showing that the gift funds have been seasoned for at least 30 days. It needs to show gifted funds being withdrawn from their account and deposited to the home buyer’s bank account.
What is the Estimated Cash to Close to the Borrower?
The amount of money required to be paid by the borrower at closing to complete the purchase or refinance of a property is known as the cash-to-close estimate in a mortgage transaction. It includes various costs such as the down payment, closing costs, prepaid items, and any other expenses related to the mortgage transaction.
Several factors can impact the amount of cash required to close, such as the type of mortgage loan, the property’s purchase price, location, the borrower’s credit score, and the specific terms negotiated with the lender. It is important to remember that the exact amount of cash to close can vary depending on these factors.
Typically, borrowers receive a Loan Estimate (LE) document from their lender within three business days of applying for a mortgage loan. This document provides an estimate of the cash to close based on the information provided by the borrower and the lender’s initial assessment of the transaction.
However, the final cash-to-close amount may differ slightly from the initial estimate, especially if there are changes to the loan terms or unexpected adjustments at closing.
To get the most accurate estimate of cash to close, borrowers should review the Loan Estimate provided by the lender and consult with their loan officer or mortgage broker to understand all the costs associated with the transaction.
How Are Gift Funds Viewed By Mortgage Underwriters and Lenders
Gift Funds are not viewed favorably by lenders as well as the Automated Underwriting Systems. Many times, DU/LP AUS will get you a referred/eligible per DU FINDINGS and LP FINDINGS with gift funds for the down payment. However, if gift funds are removed and say it is the borrower’s own funds, it will render an approve/eligible.
Gift Funds can be used for the down payment and closing costs. Gift Funds cannot be used for reserves. Reserves need to be the borrower’s own funds.
What is Not an Acceptable Source of Funds for Closing?
Certain sources of funds for closing a real estate transaction may not be acceptable to lenders. These include cash deposits without a clear paper trail, unsecured loans like payday loans, undocumented gifts, improperly disclosed borrowed funds, unauthorized transfers, and cash advances from questionable sources.
Borrowers should ensure that all funds used for closing are legitimate, properly documented, and disclosed according to the lender’s requirements to avoid delays or complications in the closing process.
FAQ: Cash To Close and Seasoned Funds For Closing by Borrower
1. What are seasoned funds, and why are they necessary for closing on a home purchase? Seasoned funds refer to money in a borrower’s bank account for a certain period, typically two or more months, demonstrating stability and reducing the risk of fraud. They’re essential for closing a home purchase as they show the borrower’s ability to afford the mortgage payments and comply with lending regulations.
2. How do lenders determine the acceptability of funds for closing? Lenders require documented sources of funds for closing, such as direct deposits from employers or properly sourced deposits in the borrower’s bank account. Large or irregular deposits must be explained and sourced to ensure compliance with lending requirements.
3. What’s the significance of the seasoning period for funds? The seasoning period ensures that funds have been in the borrower’s account for a sufficient duration, indicating financial stability and reducing the risk for lenders. Funds must be seasoned for at least two months to be considered acceptable for closing.
4. Can gift funds be used for closing, and how are they verified? Gift funds can be used for closing, but they must be properly documented with a gift letter signed by the donor, copies of the gift check and deposit slip, and bank statements showing the funds have been seasoned for at least 30 days.
5. What is the estimated cash to close, and why is it important for borrowers? As the borrower, you will need to bring a specific amount of funds to the closing table, including the down payment, closing costs, and prepaid items. This amount is known as the estimated cash to close. Borrowers must understand this amount to ensure they have the necessary funds for closing.
6. What sources of funds are not acceptable for closing? Cash deposits with a clear paper trail, unsecured loans, undocumented gifts, improperly disclosed borrowed funds, unauthorized transfers, and cash advances from questionable sources are acceptable for closing and can cause delays or complications.
This blog about the waiting period after foreclosure requirements for borrowers on title but not on mortgage was updated on March 29th, 2024.
i have cash under pillow i need to bring it out for buy home whats the right way to add deposit in bank to make it home buyer or loan officer.
Deposit it in a bank account. Once it has been seasoned for two months, it becomes qualified assets and you can use it towards the down payment and closing costs for your home purchase.
I borrowed money to consolidate my credit cards and personal loans. After paying them all off, I had $20,000 from the loan left over in my savings account. it has been there for 5 months, untouched. Will it be considered seasoned and secured or will it be questioned as I have the loan I am paying off. My credit score is in the very high 700’s and even with a mortgage my debt ratio will be in the low to mid 30% range.
As long as you have the funds were in your bank account for at least sixty days, it is considered seasoned.
Thank you. I also won’t have to prove where it came from? Your help is appreciated.
Correct. Lenders only want to see 60 days of bank statements. It is just the irregular and/or large deposits that are questioned and need to be sourced. Deposits prior to that does not matter. For example, if a homebuyer has tons of unsourced cash that need to be used for the down payment on a home purchase, they need to deposit the cash in the bank account and wait sixty days for it to self source. Therefore, you have absolutely nothing to worry about.
I appreciate your help–just concerned that the loan is also on my credit report and I wonder if they will ask what was the personal loan for.
This is excellent, easy to follow information. Most explanations on this subject are more confusing than clarifying.
I am like the other commenter, hoping the loan I took out months ago is not questioned to be part of my down payment. I have 90 days of bank statements with the balance in my bank account and the loan is current with my debt ratios very low.
You only need sixty days of bank statements.
hello, Im conditionally approved. One of the conditions was that I made a big cash deposit into my bank account but it was an honest mistake as a first time home buyer. I still have verified funds for cash to close, down payment and reserves for 3 mortgage payments. Can I still get approved even though I can’t source the big cash deposit? In addition, I already sent the underwriters an explanation regarding the cash deposit but couldn’t document it.
Yes, you can still get approved with large deposits but cannot use it as verified funds unless the underwriter can source it.
Ok, thank you so much! This really cleared things up for me! I was really scared about that big mistake I did.
Thanks for the article. It’s very helpful! I have a question. If I have large unsourced cash deposited into my bank account within 60 days, and then I applied for the mortgage. But the closing date is 60 days after the deposit. Cloud I get approved in this case? Since the money should be seasoned when closing.
As long as you have deposited the money and the money has been seasoned longer than sixty days, you are fine.
Hello, My spouse is currently applying for a mortgage without me (i’m waiting for student loans to come out of deferment and so cannot be included without substantially bringing down the mortgage amount since we don’t have the IBR payment calculated yet – we know mine will be similar to hers though). Anyway, I wanted to take out a personal loan for my wife that I can give to her as a gift and that I pay off myself over the next year. Our finances are separate, so it is only my bank account that would be touched. Is this acceptable and possible even though I will have had the funds for less than 30 days? Time isn’t on our side for this one because of our moving timeline.
We can work this out. However, before you do anything, please reach out to us at gcho@gustancho.com. Looking forward to working with you and your wife.
We are conditionally approved for new construction. We went through underwriting and we are just waiting for the home to be built
In 4-6 months. If we are sending in our bank statements monthly, how is seasoning handling if we get a personal loan today and closing isn’t for at least 4 months? Would this kill the approval?
The monthly payment on the personal loan will be used to calculate your debt to income ratio. I would check with your loan officer.
I’m currently in the underwriting phase and a relative has just offered to help rebuild some of the savings I’ll be using to cover my closing costs. I believe I’m understanding correctly that if I deposit that money in my account before closing, a gift letter and accompanying details would need to accompany it.
Am I better off just holding that money aside until a few days after I close, and then depositing it in my account after the underwriters have finished their work and everything is finalized and done? My relative is elderly and not technologically inclined and asking them to provide and send proof of withdrawal/deposit/the letter could be a big ask of effort if it could be avoided by just sitting on the money for a bit, instead.
Thanks for your input!
Any gift funds need to be documented. From what you are saying, if you do not need the gift funds for closing, then hold off until you have closed. You can deposit it now but cannot use those as part of qualified funds to use it for the down payment and/or closing costs.
We just signed a new construction contract. We had $10000 for earnest money but the builder wanted $30000 because the house is $600000, so we borrowed $20000 from my husband’s like of credit. My grandparents intend to gift our down payment and we were told that we get the earnest money back, but now we fear that we messed up our conditional approval because of this loan. Our debt to income ratios are still low, but want to know what happens with the earnest money deposit. Also, since our builder will have had the earnest money for six months by the time the house is finished, am I overthinking? Is the proof of wire to the builder and then it sitting there six months enough?
As long as the funds are seasoned over two months, it does not matter. Worst scenario, the monthly payment will hit you on the debt to income ratio calcualtions
What if you have 10,000 in savings in preparation to buy the rental home that you live in, which will be for sale soon. You aren’t sure exactly when that soon will be. You are nervous due to worldly goings on and would like to withdraw that money. You would have the records of it being in savings for months, along with the withdrawal slip. Could you then consider it documented and it not have to be seasoned when the time comes to actually apply for said mortgage and you redeposit it?