Seasoning Update 2024

It’s been a while since we have discussed seasoning on this blog and it’s about time to talk about the changes that have taken place in the past few years and discuss further the different meanings of seasoning that exist for a mortgage.

What Is Seasoning?

Seasoning is the practice of requiring that a mortgage be held for a certain time period before it is either refinanced or the property is resold. With seasoning, the time period requested has varied over the years and also varies based on the situation. Most mortgages follow the federal guidelines for lending published by the Federal Housing Authority (FHA), but there are a few industry-imposed seasoning time periods, as well.

The practice of seasoning ensures that a mortgage is able to maintain a certain value before the property is sold. For government programs and federally insured loans, the seasoning requirement ensures that their discounted and subsidized loans are not being used for investment purposes. That is why they require that all FHA loans be held 6 months before they are refinanced there is also another requirement that a mortgage beheld for 210 days prior to being refinanced into an FHA mortgage. This seasoning requirement ensures that real estate investors are not using government money, used to incentivize homeownership, to flip homes or buy rentals, two things that are not homeownership.

Conventional mortgage lenders, unlike FHA lenders, are less concerned about what subsequently happens to a property after they underwrite a mortgage and more concerned about the lifetime of their mortgage. Mortgage lenders want to ensure that the mortgages that they underwrite are not going to be paid off right away, because the banks that give them warehouse lines of credit to lend or Fannie Mae and Freddie Mac, to whom they are looking to sell their mortgage, are interested in receiving as many mortgage payments as possible over the life of the loan. For banks, Fannie and Freddie, prepayments in the form of refinances or property sales cut short the amount of interest that they would have received on the loan. This makes unseasoned loans more unprofitable and thus riskier. This is why most conventional loans employ prepayment penalties to disincentivize quick resales and refinances. It is also why Freddie has a 6-month to  12-month seasoning requirement for its refinances. These concerns are similar with respect to private lenders and securitized loans, which are a much smaller portion of the market. Seasoning practices for these loans are similar to conventional loan seasoning, but the terms and timeframes may vary.

Downpayment Seasoning

In addition to mortgage seasoning, lenders want to be sure that a borrower truly has the funds necessary to put down for a house and is either not borrowing them from yet another source, obtaining them fraudulently or using the purchase to hide some type of fraud. This is why downpayment seasoning requirements exist. In most cases, downpayment funds must be held in the account of the borrower for at least 60 days prior to closing. Notable exceptions to this guideline are, of course, mortgages that don’t require downpayments, but also funds from family gifts, tax refunds and employer bonuses. The Mortgage Reports.com has a great article on mortgage seasoning that discusses downpayment seasoning more in depth than this article and can be accessed here.

Cooling Off-Periods

There are a number of waiting periods that banks also place on borrowers who wish to obtain a mortgage, but have either undergone a bankruptcy or a foreclosure. Most articles and discussions include these “cooling off” periods in their discussion on seasoning for purposes of convenience. Some even call these periods bankruptcy and foreclosure “seasoning.” It is clear, however, that these cooling off periods are less about what happens to the mortgage and more about the borrower’s creditworthiness and thus are not true seasoning periods. This however does not make them less important.

The bankruptcy and foreclosure cooling off periods for banks serve a number of purposes for a lender. All lenders want to be assured that a borrower has had sufficient time to address the factors that led to their financial distress and paid off all of their creditors. These cooling off requirements in the case of a bankruptcy and foreclosure demonstrate that a buyer is ready to purchase a property. Most bankruptcy cooling off periods are 4 years for conventional loans and between 2 and 3 years for governmental loan programs. Foreclosure cooling off periods are typically longer than bankruptcy periods and last up to 7 years, in case of conventional loan, and 2 to 3 years for governmental-backed loans.

Reverse mortgages, by law, can have a up to a 12-month seasoning. This can be seen as either a seasoning period or a cooling off period, as it serves both purposes.

Mortgage seasoning hasn’t changed much since the last seasoning article on this blog, but an update never hurts. Seasoning and cool-off periods are ways that lenders attempt to protect the performance of the mortgages they underwrite. Understanding the seasoning industry standards can lead to more profitable real estate transactions for everyone.