Buying property as a small-business owner is often a huge milestone, one that can give you a sense of security as you pay into your own investment instead of someone else's. When you first purchase property, your brand new mortgage is not considered seasoned yet. You need to wait before you can make a late payment, sell your property, or refinance your mortgage at a better rate.
TL;DR (Too Long; Didn't Read)
In the mortgage industry, seasoning refers to how long you have had your mortgage. A mortgage older than one year is generally considered "seasoned."
Mortgage Seasoning Basics
Mortgage seasoning is the length of time you have held your current mortgage. After you have held your mortgage for at least 12 months, it is typically considered to be seasoned. For the purpose of reselling a property, some mortgage lenders might consider a property seasoned after 90 to 180 days. During this initial seasoning period, it is imperative to make all mortgage payments on time so that you have the flexibility to take full advantage of financial options later on.
Certain mortgages hold an unusually long seasoning period. For example, be aware of the following circumstances:
- Bankruptcy loans: Two- to three-year mortgage seasoning period, depending on the lender
- Incomplete bankruptcy plan: Four-year mortgage seasoning period
- Foreclosure: Three-year mortgage seasoning period
- Short sale: Three-year mortgage seasoning period
- Charge off: Three-year mortgage seasoning period
Purpose of Mortgage Seasoning
The purpose of mortgage seasoning is to prevent people from unethically flipping properties and to grant lenders confidence in your financial reliability. When businesses quickly sell properties, they may do so using an inaccurate or inflated property valuation. Mortgage seasoning protects lenders, buyers and ethical companies that aim to buy and sell properties with integrity.
Seasoning Requirements for Refinancing
Seasoning requirements for refinancing vary from lender to lender. Some lenders require you to make at least 12 months of mortgage payments on time to qualify for refinancing options. Other lenders only require six months of mortgage payments for seasoning, especially in the noncommercial market for things like FHA-insured home loans.
This seasoning period also applies if you want to do a cash-out refinance to inject your business with additional operating funds. Even if you want to take out a Commercial Equity Line of Credit (CELOC), you need to abide by seasoning requirements. The well-being of your business depends on you planning for an abundance of cash flow during the year after a property purchase.
Seasoning Funds for Down Payment
If your business is getting ready to purchase property, it is important to recognize that your mortgage isn't the only thing with seasoning requirements. Even your mortgage down payment must be seasoned before you can use it toward your property loan. If you raise a significant amount of money in a short period toward a down payment, it typically needs to sit in the bank for 60 days before your lender considers it as eligible toward your down payment.
A small-business owner needs to think in terms of long-term financial goals and plans before buying property. You're in the best position to support this important business move when:
- Your business has been profitable for several months or years.
- You have consistently saved money and experienced a growing bottom line.
- You have the resources to cover unexpected costs during the first year of your mortgage.
- You have enough financial resiliency to weather ups and downs in the greater economy.
Seasoning Exceptions to Consider
Although a relatively lengthy mortgage seasoning period is standard, there are some exceptions to this rule. You might be in luck if:
- Your purchase was an arms-length transaction.
- The property was inherited or legally awarded.
- Certain types of trusts owned the property.
- The property was purchased through specific investment programs.
- You hold a nonqualified mortgage.
Anne Kinsey is an entrepreneur and business pioneer, who has ranked in the top 1% of the direct sales industry, growing a large team and earning the title of Senior Team Manager during her time with Jamberry. She is the nonprofit founder and executive director of Love Powered Life, as well as a Certified Trauma Recovery Coach, certified HRV biofeedback practitioner and freelance writer who has written for publications like Working Mother, the San Francisco Chronicle, the Houston Chronicle and Our Everyday Life. Anne works from her home office in rural North Carolina, where she resides with her husband and three children.