August 5, 2011
When a house hunter finds a home they want to make a serious offer on, they move out of one phase of the home buying process and into another.
The shopping phase is what some view as the cost-free part of finding a home to buy with an FHA insured mortgage. Once the right property is found, that’s when the borrower starts to tap into the money he or she has set aside to deal with the costs of purchasing real estate.
One of those expenses? Using earnest money–the amount an FHA borrower puts down to show a seller they are making a serious offer on the property.
According to the FHA official site, earnest money “must be substantial enough to demonstrate good faith and is usually between 1-5% of the purchase price (though the amount can vary with local customs and conditions). If your offer is accepted, the earnest money becomes part of your down payment or closing costs.”
For borrowers who have their offer rejected, there’s no risk–the seller gives the money back. But a buyer who puts earnest money down only to back out of the deal later runs the risk of losing the earnest money, which is why it’s important to think carefully about making the offer before committing.
Because the FHA requires documentation of other funds used in the purchase of a home with an FHA insured loan, (including the source of monthly mortgage payments) it’s logical to expect rules covering verification of earnest money, too.
According to FHA requirements, “If the amount of the earnest money deposit exceeds 2 percent of the sales price or appears excessive based on the borrower’s history of accumulating savings, the lender must verify with documentation the deposit amount and the source of funds.”
The FHA will accept documentation such as canceled check for the amount of the earnest money. It also accepts “certification from the deposit-holder acknowledging receipt of funds”. FHA rules say “separate evidence” of earnest money sources is also acceptable to include a bank statement or verification of deposit.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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