Seasoning Period
A seasoning period is a mandatory waiting time, typically 6-12 months, that a borrower must own a property before qualifying for a cash-out refinance or other equity-based loans, implemented by lenders to mitigate risk and verify property value.
Key Takeaways
- A seasoning period is a mandatory waiting time imposed by lenders before a property can be refinanced, especially for cash-out options.
- Its primary purpose is to mitigate lender risk by preventing fraud, verifying property value stability, and ensuring borrower commitment.
- Seasoning durations vary significantly by loan type, with conventional, FHA, and VA loans having specific requirements (e.g., 6-12 months).
- The BRRRR investment strategy is directly affected, as seasoning delays the cash-out refinance phase, tying up investor capital.
- Investors can navigate seasoning by planning ahead, understanding diverse loan products, engaging portfolio lenders, and considering bridge financing.
What is a Seasoning Period?
A seasoning period in real estate refers to the minimum amount of time a borrower must have owned a property before they can refinance it, particularly for a cash-out refinance, or before they can use its equity for another loan. This waiting period is a critical risk mitigation strategy for lenders, designed to ensure the stability of the borrower's ownership, verify the property's value, and prevent potential fraud. It's a standard practice across various loan types, though specific durations can vary significantly.
Why Lenders Implement Seasoning Requirements
Lenders impose seasoning periods primarily to protect their interests and maintain the integrity of the lending process. By requiring a borrower to hold a property for a certain duration, lenders can mitigate several risks. This includes reducing the likelihood of property flipping schemes where a property is quickly bought and resold at an inflated price, or preventing borrowers from immediately extracting equity from a property whose value might not yet be stable or accurately assessed. It also allows time for the borrower to demonstrate consistent payment history and financial stability.
Common Seasoning Durations and Loan Types
- Conventional Loans: Typically require 6 to 12 months of ownership for a cash-out refinance, though some portfolio lenders may offer more flexible terms.
- FHA Loans: Generally require a minimum of 6 months from the date of purchase for a cash-out refinance, with specific rules regarding property value increases.
- VA Loans: Often have a 12-month seasoning period for cash-out refinances, calculated from the date of the last loan closing.
- Portfolio Lenders and Private Money: These lenders often have more flexible or no seasoning requirements, as they lend based on their own risk assessments rather than strict agency guidelines.
Seasoning's Impact on Investment Strategies
The seasoning period significantly influences various real estate investment strategies, particularly those involving rapid property improvements and equity extraction. Investors must carefully factor these waiting periods into their financial projections and timelines to avoid liquidity issues or unexpected delays in their investment cycles.
Example 1: BRRRR and Cash-Out Refinance
Consider an investor executing the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat). An investor purchases a distressed property for $150,000, invests $50,000 in renovations, bringing the total cost basis to $200,000. After repairs, the After Repair Value (ARV) is appraised at $280,000. The investor rents out the property. To pull out their initial capital and reinvest, they plan a cash-out refinance. If their lender requires a 6-month seasoning period, the investor cannot initiate the refinance until 6 months after the initial purchase date, regardless of how quickly the rehab and rental phases are completed. This means their capital remains tied up for that duration, impacting their ability to acquire new properties.
Strategies for Navigating Seasoning Periods
While seasoning periods are a standard part of real estate financing, investors can employ several strategies to manage their impact on investment timelines and capital deployment:
- Plan Ahead: Always factor the seasoning period into your investment timeline and financial projections. Understand that your capital may be tied up for several months, and plan your next acquisitions accordingly.
- Understand Loan Products: Research and compare different loan types and lenders. Some conventional lenders, FHA, or VA loans have specific seasoning rules, while portfolio lenders or private money lenders may offer more flexibility.
- Build Relationships with Portfolio Lenders: These lenders often keep loans on their books rather than selling them on the secondary market, allowing them to set their own, often more lenient, seasoning requirements.
- Maintain Detailed Records: For properties where significant value has been added through renovations, having meticulous records of all improvements, costs, and permits can sometimes help in discussions with lenders, especially if seeking exceptions or faster processing.
- Consider Bridge Financing: For investors who need to access capital quickly before a seasoning period ends, a hard money loan or bridge loan can provide short-term liquidity, albeit at a higher interest rate.
Frequently Asked Questions
What are typical seasoning periods for different loan types?
Typical seasoning periods vary by loan type and lender. Conventional loans often require 6-12 months, FHA loans generally need 6 months, and VA loans usually have a 12-month period for cash-out refinances. Portfolio lenders may offer more flexible terms, sometimes with no seasoning requirement, depending on their internal policies and the borrower's profile.
Does seasoning apply to all types of real estate transactions?
Seasoning periods primarily apply to refinances, especially cash-out refinances, where a borrower seeks to extract equity from a property they already own. They are less common for standard purchase loans, though certain niche products or property types might have specific holding requirements. The intent is to ensure the property's value and the borrower's commitment are established before additional funds are lent against the asset.
How does the seasoning period affect the BRRRR strategy?
The BRRRR (Buy, Rehab, Rent, Refinance, Repeat) strategy is significantly impacted by seasoning periods. While an investor can complete the Buy, Rehab, and Rent phases quickly, the Refinance step, particularly a cash-out refinance, will be subject to the lender's seasoning requirements. This means the investor's capital will remain tied up in the property for the duration of the seasoning period, delaying their ability to repeat the process with a new acquisition.
Are there ways to avoid or shorten a seasoning period?
While it's difficult to completely avoid seasoning for agency-backed loans (FHA, VA, Conventional), investors can explore options. Working with portfolio lenders or private money lenders often provides more flexibility, as they set their own underwriting guidelines. Additionally, bridge loans or hard money loans can be used as short-term solutions to access capital before a seasoning period ends, though these typically come with higher interest rates and fees.