Seasoning refers to the age of your mortgage. Generally, lenders consider a loan fully seasoned when you've had it for at least one year. If you wish to sell or refinance, the seasoning of your loan is crucial. Many lenders will not refinance an immature loan, and those wishing to sell a property with an unseasoned mortgage face increased scrutiny from the buyer's mortgage lender.
Justification for Seasoning
Seasoning exists to prevent flipping schemes. Popular in the years leading up to the housing bust of 2008, flipping happens when an investor buys a property and sells it on at a profit within 12 months, often with an artificially inflated value. Alternatively, the owner repeatedly refinances the home for higher amounts to extract as much cash as possible, before letting the home go into foreclosure. Lenders don't like making loans on flipped properties because they are risky.
Reducing the Risk
Lenders reduce their risk through title seasoning requirements. Generally, if you've owned your home for less than one year and want to sell it or refinance the mortgage, you'll have to sit out the seasoning waiting period before your transaction can go through. Seasoning periods vary among lenders, and lenders increasingly are relaxing their seasoning requirements. The Federal Housing Administration, for example, might refuse to back a buyer's mortgage unless the seller owned the property for a certain amount of time, depending on current FHA policy.
While the buyer's mortgage lender requires the seller to have held title to the property for the lender's seasoning period, the crucial factor is price. If the agreed-upon sale price is significantly greater than the price paid by the seller, and the title is unseasoned, the buyer's lender requires evidence to support the uplift in value. The evidence could be presented in the form of renovation bills, before and after pictures of the property or documentation provided by the realtor. The lender may insist on a second appraisal or refuse to fund the higher price.
Cash-out refinancing involves refinancing your existing loan for a higher amount and taking out the extra cash to use for home repairs, unexpected medical bills or to pay off a high interest loan. Most lenders will not let you cash out your equity or take out home equity lines of credit without full seasoning. Fannie Mae, for example, imposes a six-month seasoning period for refinances. However, Fannie's delayed financing program waives the six-month wait period if the homeowner bought the house with cash.
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