Seasoning, yummy!

May 5th, 2010

Believe it or not the word “seasoning” does come into use in the mortgage world. Seasoning means the length of time a homeowner has owned their home and paid on their mortgage. If you bought your house one year ago, you have ‘one year seasoning’. This is important when you buy a house and want to refinance it quickly.

Some people want to refinance quickly because interest rates have dropped far enough below the interest rate they got when they bought the house that refinancing will save them a lot of money. And others want to refinance quickly after settlement to pull some ‘cash out’ of their home for repairs or renovations.

If you do not have at least six months seasoning you can still refinance, but you will not be able to use the increased appraised value in less than six months. In other words, to base your refinance on an increased appraised value, you can’t use the higher value until six months has elapsed (also known as six months seasoning).

An example of this would be:

On January 1, 2009 a new home was purchased for $500,000. Renovations were completed by March 2009 in three months time, and the renovations cost $200,000 and the home will now appraise for $800,000. But since only three months has elapsed, you cannot base your refinance on the new, higher appraised value of $800,000. You can still refinance, but most lenders will base the value not on a recent appraisal, but on the acquisition cost plus documented receipts for all of the renovations. So in the above example, the refinance would be based on the $500,000 acquisition cost plus $200,000 renovations costs, or $700,000. When six months has elapsed, you would be able to use the appraised value of $800,000.

In the above example, if the homeowner wanted to take some cash out to recoup their renovation costs, they would recoup less cash due to using a lower appraisal valuation. Or they could wait until six months from the date of purchase, and then be eligible to use the higher appraised value.

And, in another example of “seasoning”, if you have your home listed for sale, you won’t be able to refinance. Mortgage lenders expect loans to last for a certain period of time, they don’t want to make short term loans, they want to lend to people who appear that they will own the property for a while. Lenders make money from servicing loans. When you put your home on the market, you’re signaling that you really want to sell. If you take the home off the market, that signals your intentions are to stay, and a lender will refinance your loan. Properties listed for sale in the 6 months preceding the application date for new financing are limited to 70% Loan-To-Value though, So, to recap, if your home is on the market for sale, you cannot refinance. If it is off the market, even for just 1 day, you can refinance.

Loans aren’t immediately profitable for lenders. They have to be held for a period of time to become profitable. That’s why lenders want to be sure you’ll be in your home for a certain period of time.

Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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