Seasoned funds and paper trails are about being certain you can demonstrate to a mortgage underwriter the source of any unexpected funds that appear in your bank accounts. Typically, underwriters recheck your bank accounts a few days before funding your mortgage. If he or she finds significant but unexpected changes in the account balance it will often result in the mortgage being denied.
Many Sources of Seasoned Funds and Paper Trails
Generally, underwriters want to see a 90 days of documentation for any major and unexpected changes in your bank accounts. The sources of these funds are typically legitimate and can come from many places. They may come from a business transaction that you were planning on to help finance your down payment. Something like a payment to your small business that you transfer to your personal account. Or the sale of another real estate investment that you had in the works. Or the sale of another asset such as a boat. What is important is that these are seasoned funds with paper trails.
What underwriters are concerned about is the funds come from another loan that increases your debt to income ratio. Another relatively common undocumented source of funds is a financial gift from relatives. Unless these are seasoned funds with paper trails, underwriters will consider these as loans that you have to repay. About the only possible solution is having a notarized letter stating this is a gift that will not be repaid.
New Funds Don't Always Kill a Mortgage When These are Seasoned Funds With a Paper Trail
Taking out another loan to help with the down payment and closing costs won't always cause your mortgage to be declined. However, the underwriter will need to know what the terms of that loan are, how much your payments are going to be, if the payments are fixed or variable, and all of the other things that help them determine whether you qualify for this new loan even when making the payments for the other loan. You need to have that paperwork available to show seasoned funds with a paper trail.
Even if the money was a gift from a relative (or otherwise), the underwriter is going to want to know where they got the money. You're still going to need to show 90 days worth of seasoned funds with a paper trail. Lenders are not in the business of repossessing houses. In light of the massive repossessions in the recent past, lenders are demanding a clear view of seasoned funds and a paper trail.
When the funds come from selling a previous property, they are going to insist on seeing the HUD 1 form related to the transaction. When the funds come from selling another asset, the underwriter will insist on seeing a bill of sale (preferably notarized). If the money is gifted, you'll need a notarized letter from the donor along with a paper trail showing where the money came from over the past 90 days.
If you are planning to buy property in the near future or even refinancing, keep all of the paper work involved from significant transactions and voluntarily make it available to the underwriter. If an unexpected transaction comes up while you are waiting for a mortgage to be funded, talk to the loan officer about the seasoned funds and a paper trail that will be needed to keep the mortgage qualified.
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