Mortgage seasoning is the length of time you have had your mortgage. Typically, after you have had your mortgage for more than one year, lenders will consider your mortgage "seasoned." During the year prior to seasoning, you must make all payments for the mortgage on time. This shows prospective lenders that your current mortgage is in good standing. The exact amount of time that you must season a mortgage varies by lender. Generally, lenders require one year, although some lenders may offer programs that require less.
Reason for Seasoning
Lenders require seasoning because they want to avoid making loans on flipped properties, which are generally riskier for the lender. Seasoning, however, does not guarantee protection from bad loans. If you have property that requires seasoning, you may want to consider renting out the property for a year prior to selling the property. This will allow you to meet property seasoning requirements for prospective buyers that require mortgage financing. On refinance loans, lenders require you to season the existing mortgage to prevent you from taking out a new mortgage loan and immediately refinancing the loan.
A flipped property is a property that you buy and sell in a short period of time, usually less than one year, to make a quick profit. Since flipped properties are generally sold at a profit, flipping tends to over inflate the value of properties. Although lenders may choose not to make loans on flipped properties, there is nothing illegal about buying a home and selling it for a profit within a short period of time.
Title seasoning is another type of seasoning used by lenders to evaluate collateral properties. Unlike mortgage seasoning, which looks at the payment history on an existing property, title seasoning looks at the title history of the property. Lenders typically want to see one year or more of title seasoning showing continuity of ownership.
Loan to Value Ratio
Lenders may offer specific loan programs that do not require mortgage or title seasoning. Typically, loan programs without seasoning requirements have lower loan to value requirements. Loan-to-value, or LTV, is the percentage of the mortgage loan divided by the appraised value of the property. According to the book “Principles of Real Estate Finance,” lenders typically prefer to make loans with loan-to-value ratios of less than 80 percent. Loans made on non-seasoned mortgages and titles may require ratios significantly lower than 80 percent.
- "Principles of Real Estate Finance"; Charles A. Long; 2010
Rules for Mortgage Seasoning
You may be tempted to refinance your home loan to one with lower interest rates. Refinancing a $200,000 mortgage with a 30-year...