Title Seasoning Guidelines: Every Investor’s Nemesis

Lender title seasoning guidelines present an obstacle to many investors; but they can be overcome…

Investors who rehab houses with the intent to sell relatively quickly for capital gains know their potential buyers will most likely need a FHA or conventional owner occupied home loan. Other rehab investors, who opt to sell their finished homes to other investors at discounted prices, understand that their buyer will probably require a non owner occupied home loan. Perhaps the biggest obstacle a seller, or a Realtor representing a seller, will face in trying to close out a flip is what is referred to as a seller title seasoning requirement. A seller title seasoning requirement is a guideline created by an individual mortgage lender which decides the minimum term of ownership a seller must have when selling a given property to a buyer who qualifies for a loan from that particular lender. Also called a “lender seasoning requirement”, this hurdle is created to protect a lender’s own interests when deciding to lend money to a potential buyer as a seller tries to make a quick profit.

In laymen’s terms, mortgage lenders don’t want to take the risk of lending a dime – to even the most qualified borrowers, for the purchase of a home that a seller stands to make thousands of dollars on. Lenders make it a practice to compare the current price of the home being sold to the original price the seller paid for that particular home by checking public records. If the home being sold has been owned by that seller for a shorter term that the mortgage lender’s title seasoning guideline states (varies by lender), the price difference (i.e. the seller’s potential profit) is referred to as “equity stripping”; thus the loan for any potential borrower is then denied. The seller is stuck holding the bag and often times has to find a different lender for their buyer.

Mortgage lenders feel that large increases in a home’s value should be weighed more heavily on the length of time an owner appears on the title of the home being sold (i.e. how long the seller has actually owned the home) versus the actual improvements the seller made to that property. Lenders believe that a home bought much lower than it is being sold for within a 1 year period, is risky collateral for a loan because it requires the buyer to borrow more money for that home than the home could actually be worth.       

“Equity stripping” is the term lenders use when referring to the practice of sellers trying to flip a property for profit sooner than their seller seasoning guideline allows. Beginning investors need to understand many different lender seasoning guidelines before buying a home to sell for profit.

Conventional lenders generally require a seller to own their house being sold for over one year before lending money to a qualified borrower for the purchase of that particular house. FHA lenders, who generally loan mainly to first time homebuyers, now have a 90 day seller seasoning requirement. Senior citizens age 62+ cannot execute a purchase using a reverse mortgage unless a particular seller has been the owner on title for one continuous year or more.

Here is an example of a lender title seasoning dilemma that a seller or a real estate agent representing a seller can commonly run into: A home was bought by an investor for $60,000 with the intent to rehab and sell it for profit. This particular investor puts $20,000 of updates into the home, finishes the rehab in 60 days and puts the home on the market for sale. The home appears to be worth $120,000 based on recently sold homes of similar style and square footage in the area. A buyer shows interest in the home and signs a purchase agreement with the seller. The buyer has everything a mortgage lender would want: 2 year employment history, 2 years proof of on time rent payments to their landlord, 2 month’s bank statements showing enough savings for the down payment, and a low debt to income ratio (<40%, including proposed housing expense) proving to the lender that they can easily afford the house. Everything looks positive – this deal sure looks closable. Both parties agree on a $105,000 sales price, which is $15,000 under fair market value. The buyer goes to a reputable mortgage lender and applies for a mortgage. Two weeks into the loan process, the bank mortgage underwriter sees on the appraisal and on public records that this house (now being sold for $105,000) was bought just 2½ months earlier for just $60,000 by the current seller. Unfortunately, the lender has a 6 month seller seasoning guideline and declines the buyer’s loan. This seller is out of luck – at least temporarily, and their buyer walks away from the deal.

How to Get Around Lender Title Seasoning Issues

There are several solutions for facing lender seasoning guidelines – including the lender seasoning guideline in the above scenario. One solution is to become familiar with many mortgage brokers and bank loan officers in your area and discuss your intentions with them. The more mortgage professionals you know, the better your chances are of closing your sales because every lender has their own specific seasoning guideline (and these guidelines change daily). Try to have your buyer submit their loan application and related documents to an investor friendly mortgage broker or bank loan officer. They have the knowledge to choose lenders more apt to lend to a potential buyer on deals involving short term ownership. A good mortgage broker or loan officer should know that the loan underwriters working on your buyer’s loan aren’t investors and don’t understand the logic behind transactions like this; they only see numbers and have to follow written guidelines and procedures. When underwriters see big numeric gains in property value (seller’s original purchase price versus current sales price) in a short period of time, they always assume fraud and the deal dies.

A mortgage professional has to be like a defense attorney when they decide to send a buyer’s loan file to underwriting.  There are several things a mortgage professional should do to put together a “good case” for the loan underwriters on this type of transaction. This would include having the property appraiser insert extra comparables from the surrounding neighborhood, interior photos showing improvements (which justify the seller’s price), a list of all the improvements to the property, plus all contractor labor and material receipts. When a bank underwriter sees that the value increase of an “unseasoned” property was due to legitimate home improvements, the deal will often slide through and close.

Another good tip is to screen your buyers. Work with a potential buyer who can show proof of a 720+ middle credit score. Middle credit scores above 720 are the Holy Grail according to most lender’s underwriting guidelines. Lenders also look favorably upon borrowers who have good reserves of cash in the bank – provable for 60 days or more. Lenders consider “good reserves” to be the borrower’s down payment funds plus closing costs (figure $5,000 in closing costs for every $100,000 in purchase price) and 6 months PITI reserves. Remember too that >90% financing is more difficult for potential buyers because of the times we’re in. The higher the loan to property value (LTV) the riskier the deal is in the eyes of lenders. Try to work with buyers who have cash reserves sufficient enough to afford a 20% down payment if they cannot obtain an FHA loan. Working with first time home buyers is your best bet right now though because FHA seasoning guidelines are roughly 90 days (and are soon expected to be lowered to 30 days) and the FHA minimum down payment is only 3.5%.

First time home buyers with low credit scores (sometimes as low as 500) are qualifying for FHA home loans. An FHA loan covers 96.5% of the purchase price at the time of this writing. The borrower needs to have a 3.5% down payment which can be gifted from another individual. .

Pass Notes

Our schoolteachers always told us that passing notes was bad; but not when it comes to overcoming lender seasoning guidelines, however. There is a “secret” type of mortgage financier that exists, which most sellers never explore: note buyers. Sellers who work with note buyers quickly learn that the process for qualifying home buyers for a loan is easier through note buyers than through traditional mortgage lenders – especially in today’s depressed market. Note buyers often lend money to buyers for the purchase of homes owned for less than one year and do not require a buyer to make a down payment; the seller can gift some of the subject house’s equity to the buyer to suffice for their inability to make a down payment. This is called seller financing.

If a seller seeks funding for a potential home purchaser through a note buyer, that seller will need to first create a mortgage note with the prospective buyer. The note buyer generally shows sellers how to do this – and provides all the necessary paperwork. Then, that note buyer will purchase the note the seller creates between themselves and their buyer and create a new mortgage that the borrower will make payments on over time. Often times, note buyers will sell the note created through this process to large banks, REIT’s, investment firms or other lenders relatively quickly. This is how they make their profit. The only catch to working with a note buyer is that the seller usually has to give up a sizeable slice of equity to their buyer which is considered to be their buyer’s down payment – usually 15-30%. This means sellers who use note buyers are selling their home at a substantial discount.

Why Fight it?

As the old saying goes: “if you can’t beat ‘em, join ‘em”. Instead of fighting lender title seasoning rules, many smart sellers work out an arrangement with a potential buyer to rent their house until the home becomes “seasoned”. There are two advantages to this: The first advantage, is that if a seller borrowed money to purchase and renovate the subject house, the buyer’s rental payments will cover the seller’s principal, interest, taxes and insurance (PITI) to carry the house while waiting for title seasoning. The second advantage is that most lenders allow buyers to contribute towards their down payment on a monthly basis through the property owner if it is facilitated in the lease-option contract. This helps buyers with very little savings to execute an eventual purchase because their rental payments count towards their down payment with each month they pay their rent. The seller must specify in their rental agreement contract with their potential buyer how much of the buyer’s monthly lease payment will go towards their down payment before they apply for their loan. Many sellers become credit experts and work with their buyer to maximize their credit scores during the lease period so that financing is easier for them when they decide to buy the seller out. Alternatively, many savvy sellers are making it mandatory for their buyers to seek credit help during the lease period so they are credit worthy borrowers when the property is “seasoned” and ready for sale.

Besides other factors, banks prefer not to lend to potential buyers based on what is referred to as an “F-score”. An F-score is the percentage of foreclosures in any given area. When the F score in the area you’re trying to sell a house in is high, your buyer’s loan usually gets killed. When the F-score is low in the area surrounding your subject home, your buyer’s loan usually passes this phase of bank underwriting during the process of your potential buyer obtaining a loan. So operate your investment activities in low F-score zones. In layman’s terms, smart sellers don’t do deals in marginal areas where the F-score is high. High crime rates are good indicators of high F-score areas. Smart sellers also work with appraisers who can show them the areas to avoid buying property in and the areas to invest in. The best way to find a good appraiser is by networking with other investors and investor friendly mortgage brokers.

Working with a knowledgeable appraiser is paramount for sellers that are battling current lender seasoning requirements. An appraiser can show you areas that have stable values versus areas to stay away from. Solid appraisers can also feed you real time information that comes straight from banks; information such as guideline changes etc. This will help steer you into timely decisions rather than costly ones. In good markets, values are consistent and appraisals slide through bank underwriting with no problem. But now, we are seeing foreclosed homes selling for $20,000 in areas where a home in good condition should sell for $100,000. This is causing appraisers all sorts of problems in finding a home’s true value because banks want roughly 30% of the comparables contained in every appraisal to be foreclosed homes. This is because lenders are skeptics and are only out to protect their best interest – so their solution is simple: chop the appraised value by making appraisers use ugly foreclosed homes to dull the value of nicer homes on the market. This guards their system but crushes the value any seller’s potential deal. And remember too that banks are now calling on appraisal brokers who send out random appraisers to valuate the home being sold. You cannot order your own appraisal anymore or influence an appraiser’s final value; therefore you need to purchase only the very best deals possible so that when you sell, you can still profit despite a large value reduction at the hands of banks and appraisers working hand in hand.

Wholesale Ugly Properties to Cash Investors

Another way to dance around lender seasoning guidelines when selling a home is to simply not deal with buyers requiring a mortgage loan at all. Obviously there can’t be any lender title seasoning requirements if a buyer intends to purchase a home with cash. Appraisals can’t get chopped either because no mortgage lender is in the picture to influence value (although a seller and buyer can hire their own appraiser to make sure the deal is fair for the buyer). Cash investors looking for really good wholesale priced deals are all over the place right now and are easy to find with simple marketing. One idea to satisfy current wholesale demand is to link up with big investor sellers in your area who own many homes needing rehab and simply add a set fee onto their bottom line price. They’ll be glad to pay you whatever fee you want when you start to sell their homes for them. Wholesale cash buyers generally will rehab themselves to create their own sweat equity. This genre of buyer doesn’t pay attention to a home’s physical beauty, but rather the numbers behind the home (price compared to fair market value).

Instead of selling other people’s homes, you could personally buy one cheap house at a time and mark each one up a few thousand dollars to sell individually to cash buyers. Eventually you may earn enough money as a wholesaler to buy several homes at a time and sell in bulk fashion to big cash buyers. There are many companies that buy wholesale priced homes in bulk quantities with large sums of cash. Some simple networking online may be all you need to dig up some cash buyers or wholesale sellers. Listen to what potential cash buyers tell you and you may never have to deal with lender seasoning guidelines again.

Be a Middleman and Sell Other People’s Seasoned Homes

There are many experienced real estate investors that currently own portfolios of already-seasoned homes they wish to sell. Some are tired landlords looking to sell their tenant occupied homes. Others are rehab investors that have newly renovated homes that they’ve owned for over 90 days and even over one year in some cases. By putting together a good marketing campaign aimed at both investor and owner occupant buyers, you should be able to sell other people’s “seasoned” homes for a set fee you arrange with them. There is no risk associated with personal ownership in this scenario and there are tons of buyers and sellers to link together by selling other people’s seasoned homes.