Elgin Fox Valley
July 8, 2013
Does This House Need Extra Seasoning?
Elgin, Illinois – Seasoning is not a term the typical home buyer expects to hear during the mortgage process, but it is of great interest to most investors. Seasoning of a loan, also known as property seasoning, in mortgage terms, means that the loan has been on the books for 12 months or longer after purchase.
Back in the real estate market of 2007-08, mortgage fraud and loan flipping ran wild. Lenders faced wily investors who wanted to flip the same loan several times to get out from a declining property. An owner repeatedly flips a loan when they refinance or sell a property for a higher amount to extract more money out of the property, often inflating the value, before it falls into foreclosure.
The high rate of fraud forced lenders to change up their regular requirements for approving refi’s or cash out loans. The new restrictions used an appraised value or a lower purchase price instead of the current property value. By using a lower price point, the lenders hope to discourage quick cash out loan refinancing and reduce fraud.
Seasoning a loan can affect a regular home buyer however, because the lender must look at the full picture of the purchase history as well as the property value. Here’s an example: Let’s say Suzie Q. Homeowner bought a house for a purchase price of $120,000 with a five percent down payment ($6,000). They make it a conventional loan for 30 years with fixed interest. Ten months later, they decide they want to refinance their loan to cash out and take a vacation to Hawaii. So, they’d like to take out a new loan for $140,000. Unless they have documented their home improvements to the property (and they are worth over $20,000), the mortgage lender will assess the property at the original purchase price of $120,000. Getting an appraiser out to check the comparable properties in their neighborhood may help their case. However, not having a minimum of 12 months’ time on the loan will make it difficult to process. Now imagine if Suzie Q. Homemaker had taken out 2 or 3 loans previously on the same property in less than 10 months’ time. Few lenders would risk taking on such a refi.
Conventional loans currently require 12 months’ seasoning, with FHA loans requiring 90 days’ seasoning. Fannie Mae and Freddie Mac lenders currently offer loans on a new purchase, with a new appraisal, as well as 6 months’ seasoning requirement. Requirements change frequently, so always check with underwriting before applying for a loan to verify seasoning requirements as they can vary by type.
Unseasoned properties go under closer scrutiny by the underwriter to ensure a verified transaction. If you’re trying to get a refi and you’ve got less than 12 months seasoning, here are a few tips:
- Specify what improvements have been made to the property since the purchase date.
- Keep your receipts for all services, vendors, contractors, supplies, tools and materials that proves what you paid for the improvement. Estimates will not cut it.
- Ensure that the appraiser rates all improvements as up to code and done by professional, licensed contractors.
- Be aware of your neighborhood, does it support the specific type of improvements-if the neighbors all put in new kitchens with granite counters and high end appliances, then yours will be matched as comparable.
- Use the property price from the date of purchase to anchor the mortgage, and get a fresh appraisal to help show the increase in value.
What to know more about buying a home? Have questions on the beautiful Fox Valley area-Saint Charles, Batavia, Geneva, South Elgin and Elgin?Email me today for details on the Fox Valley area’s latest closings, listings and auctions!
Jennifer Kinzle, e-Pro Broker,
Charles Rutenberg Realty