By: Crystal Lake | Realtor

When you’re buying a home, you’re not just purchasing a place to live; you’re entering into one of the most significant financial transactions of your life. One critical part of this process involves ensuring your income and assets are accurately sourced, seasoned, and verified. But what does that mean, and why does it matter?

In the mortgage world, these steps are essential to confirm your ability to afford a home and to help prevent fraud, including money laundering, which is a growing concern globally. Let’s break down each step in the verification process and explore why this part of your mortgage application matters so much.

Step 1: Sourcing Your Income and Assets

When lenders ask to “source” your income and assets, they need to confirm the origins of the funds. This includes verifying that any money used in the transaction—whether for a down payment, closing costs, or reserves—comes from legitimate sources. This is done to protect against money laundering and other illegal activities.

Why It Matters:
Money laundering isn’t just a financial term—it’s a serious global issue. The UN Office on Drugs and Crime estimates that up to $2 trillion is laundered worldwide each year. Mortgage lenders are legally required to help prevent financial fraud by ensuring that the funds you’re using are clean and transparent.

How It’s Done:

• Lenders request bank statements to trace the source of funds.
• They may ask for documentation on recent deposits to verify that they come from acceptable sources (Such as employment income, savings, or other legally acquired funds).
• Cash deposits, gifts from family, or other irregular sources may require additional documentation to confirm legitimacy.

Step 2: Seasoning Your Income and Assets

“Seasoning” refers to how long your funds have been in your account. For most lenders, funds must typically be in your account for at least 60 days to be considered “seasoned.”

Why It Matters:
Seasoning helps ensure that the funds are indeed yours and not borrowed from someone else to meet the requirements. This step safeguards the lender against unapproved loans or temporary deposits intended only to make an account balance appear stronger than it is.

How It’s Done:

• Lenders look back at 60 days of bank statements to see that your funds are stable and available over time.
• Large or sudden deposits will need explanation and proof of source, as unverified funds may raise red flags.

Step 3: Verifying Your Income and Assets

Verification is the process where your lender checks your income, assets, employment status, and other financial details to confirm that you can afford the mortgage you’re applying for. The lender may verify:

• Employment income (through pay stubs, W-2’s, or direct employer verification)
• Self-employed income (typically through tax returns and profit-and-loss statements)
• Assets (through bank and investment account statements)

Why It Matters:
Verification serves two main purposes: confirming your financial stability and helping lenders ensure that you won’t take on more debt than you can handle. The Consumer Financial Protection Bureau (CFPB) reported that in the wake of the 2008 financial crisis, many defaults and foreclosures were linked to unverified or overstated incomes. Verifying income and assets ensures that your financial profile supports your loan amount, making you less likely to default on your mortgage.

How It’s Done:

• Lenders require documentation such as recent pay stubs, tax returns, bank statements, and employment verification.
• They may also contact your employer directly to confirm your income.

How These Steps Help You:

• Strengthen your mortgage application: Verification, sourced, and seasoned assets make you a strong candidate for a mortgage, increasing your chances of approval.
• Improve Loan Terms: When lenders see stability and transparency in your finances, you’re more likely to secure favorable terms and interest rates.
• Safeguard your future: Verified finances protect both you and the lender, ensuring you don’t take on more than you can afford. Buying a home is a long-term commitment, and verified income and assets help set you up for a successful, sustainable future as a homeowner.

What to Keep in Mind During the Process:

• Avoid Large Cash Deposits: Cash deposits may raise questions and require additional documentation. Stick to clear, traceable funds when possible.
• Be ready to explain unusual Transactions: Any significant transactions, such as large deposits, or transfers, will need to be explained and sourced.
• Hold off on Big purchases or loans: During your mortgage process, avoid taking on new loans or making big purchases, as this could alter your financial profile and impact your application.

Conclusion

When it comes to buying a home, accuracy and transparency with your income and assets are more than just requirements—they are essential steps that protect everyone involved. By ensuring your income and assets are sourced, seasoned, and verified, you’re helping prevent financial fraud, while also showing lenders that you’re a responsible and qualified borrower. This diligence brings you one step closer to confidently and securely stepping into your new home!