As a professional lease option investor, you want to avoid the frustration that can come from not having seasoned funds and paper trails. Sandwich lease options have funds coming from multiple sources. For the most part, 
seasoned funds and paper trails will not create issues between you and the seller. However, the tenant-buyer needs a mortgage to complete the purchase. This where you want to be particularly diligent to document seasoned funds and paper trails. Once again, I never hold anything back about sandwich lease option financing…
Money Can’t Appear Out of Thin Air
Lenders Require Seasoned Funds and Paper Trails
For the past several years, lenders have imposed probably the most stringent loan approval requirements ever. These include credit ratings, debt-to-income ratios, proof of income, and other factors. One of the other factors is proof of where the funds came from. This is known as seasoned funds and paper trails.
Seasoned funds are basically funds that have been in your bank account for at least 60 days (different lenders may have other requirements). It’s not required but it makes documentation easier when the buyer opens a bank account specifically for the purchase transaction. The down payment and closing costs are what the lender is mostly interested in having documented. It’s as easy as the buyer collecting the funds from all of their sources and depositing these into a bank account at least 60 days before applying for a loan.
Seasoned funds and paper trails let the loan application continue smoothly through the approval process.
Typically, lenders will check the buyer’s bank account for the past two months before approving the loan. As long as the money has been in the account for at least 60 days, the lender assumes the buyer has full control of the money and it came from a legitimate source.
What the lender doesn’t want to see is funds unexpectedly appearing a few days or weeks before closing. This makes lenders think the money might be another loan that must be repaid. This can mean recalculating the debt-to-income ratio and even doing a fresh credit check (a new loan shows up on a credit report within 60 days). Loans can be from any source including family and friends that expect to be repaid.
In addition to the debt-to-income ratio and credit report, lenders want to verify that the buyer has “skin in the game” (the buyer’s own money) going towards the down payment and closing costs. They also want to be sure that the buyer is a good money manager.
Paper trails are a little different from seasoned funds.
Helping Buyers Create a Paper Trail
The money to purchase a home can come from many different places and buyers are known to be creative. Maybe it comes from the sale of a car or a small inheritance or someone just gave the buyer money to help buy a home. Any of that is fine and legitimate – as long as it can be proved.
Like seasoned funds, lenders primarily rely on recent copies of bank statements to show where the money came from. Money that can’t be traced is sometimes called “mattress money.” This is money that appears unexpectedly and the buyer might claim it was being saved at home in a vault or under the mattress. Without a paper trail, this becomes a problem with lenders. If it’s mattress money, the buyers need to deposit it in the bank account long enough for it to become seasoned. However, if the funds came from selling a car last week (or something similar), the homebuyer will need a paper trail in the form of a bill of sale and a corresponding bank deposit. If the funds are a gift from a family member or qualified donor, a paper trail will be required (notice the word “qualified”). A notarized letter stating the money does not have to be repaid can be enough but check with the lender for specific requirements.
With sandwich lease options, applying the option fee typically becomes a significant portion of the down payment. The forms and contracts that come with the Sandwich Lease Options Course make sure there will be a legitimate paper trail. Using a third-party escrow account for the lease option fee is a good way to create seasoned funds and paper trails. But the option fee doesn’t sit in the escrow account waiting for closing. As soon as all of the paperwork is signed, the money is released from escrow and distributed. This creates both seasoned funds and paper trails that can be provided to the lender. The amount the tenant-buyer put down for their option is shown on the closing statement as a line item (usually as an earnest money deposit).
You also need to understand any seasoning requirements for the house title.
Acceptable Sources for Less Seasoned Funds and Paper Trails
For the most part, all funds that have been in the account and available for 60 to 90 days will be assumed to be from a legitimate source and the buyer’s money. However, many people do have acceptable funds that appear inside the 60 to 90-day window that don’t need to be seasoned. These can include:
Regular payroll deductions going into a savings account. The last few deposits don’t need seasoning when the lender can see a long pattern of regular deposits.
Retirement funds (401k) when it’s shown that these came from an account in the buyer’s name. Often buyers don’t season these funds because IRS rules allow first-time buyers to use these funds penalty-free when the funds are used to purchase a home within 120 days of making the withdrawal.
Gifted funds with a proper paper trail. It’s not the homebuyer’s paper trail that the lender wants to see. It’s the paper trail for the account the gifted funds came from. The lender wants to be sure that the gifter didn’t take out a loan on the homebuyer’s behalf and that the gift needs to be repaid. The lender wants to see the funds were seasoned in the gifter’s account.
You may not like it but the lender is going to dig deep into the buyer’s finances. Your best approach is providing clearly seasoned funds and paper trails from the beginning. Not being straightforward causes delays while the lender looks even deeper into the sources for the down payment and closing funds.
Seasoned funds and paper trails mostly involve funding the down payment and closing costs. In more complex deals it includes reserves and other contingency funds.
Sandwich lease option investing is very adaptable. Here, you’ll discover all of the proven ways to earn a handsome profit for little or no investment on your part:
- Investing In Real Estate with Lease Options.
- Advanced strategies for Buying and Selling with Lease Options.
- Your Wealth Building Arsenal.
- Add Personalized Coaching.
- Cooperative Lease Options.
- Expand to Get the Deed “Subject To.”
- Round it all out by Working with Realtors.
Let’s get you started making money today!
Wendy Patton
For more than 30 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.
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