Sourced and Seasoned Down Payments: What You Need to Know


If you’re in the process of purchasing a home loan, you probably know how difficult it is to qualify for a zero-down loan. Most people don’t – money must be brought to the closing table for down payment, which can range from 3 to as high as 20 percent.

It must also be clear that you as the borrower have enough assets for your down payment and closing costs – and unfortunately, a mortgage lender needs more than your word. They’ll require proof of funds, which they must confirm are sourced and seasoned, but what exactly does that mean?

1. Funds for mortgage-related expenses must be sourced.

When you apply for a home loan, the lender needs to know the source of funds used for mortgage-related expenses. From your standpoint, the source of funds may not matter. As long as you have cash available, a lender should willingly approve your loan, right?

Unfortunately, it’s not that simple. For home purchases, lenders do not allow applicants to borrow funds for their down payment and closing costs. The money must come from their own funds or as a gift from a relative, such as a parent, sibling, grandparent or other approved relative. Since it’s a gift, the giver won’t expect repayment.

If you receive a gift from a relative, that relative has to provide your lender with a gift letter, which will be included in your file. This letter requires detailed information about the gift, such as the giver’s name and the gift amount. The giver must also express within the letter that funds are not a loan.

Once you review your Loan Estimate with a mortgage lender, you’ll receive a rough estimate of the cash needed to close, along with inquiries about the source of your down payment. If you’ve funded the down payment yourself, acceptable sources include your personal savings account, proceeds from the sale of a previous home, or cash from a retirement account (IRA or or 401K.)

2. Funds must seasoned, contain a paper trail of at least 60-90 days.

It isn’t enough to have funds for a down payment and closing costs, you must provide a paper trail. The lender will request bank statements and retirement account statements from the past 60 to 90 days. Any funds used to cover closing and your down payment must have been in your account for at least two to three months. If the bank checks your statements and sees that funds appeared in your account within the past couple of weeks, you’ll have to provide an explanation. Basically, the bank must verify that you didn’t get a loan for your down payment.

If funds haven’t been in your account for at least 60 to 90 days, this doesn’t necessarily hurt your approval chances. The bank may approve your mortgage, as long as you can provide a reasonable explanation. For example, did you sell personal items to drum up cash for your down payment? Or maybe you recently received a work bonus, an inheritance, or other unexpected cash? If you can prove the source of recent deposits, you should be okay.

Since lenders require seasoned funds and proof by means of bank statements, it’s important to keep down payment and closing costs funds in a bank savings account. Some people make the mistake of saving their money in cash at home. However, when you keep your savings at home, there isn’t a paper trail, and some banks may not approve your loan.

For an easier loan approval process, deposit mortgage-related cash into a savings account and wait until you have at least two to three month’s worth of bank statements before applying.