In previous posts, we’ve discussed the rules for FHA loans when it comes to the sources of your required minimum cash investment or downpayment. But did you know the FHA has rules concerning the source of your earnest money, too?
In some cases the source of your earnest money may be scrutinized in a manner similar to the verifications required for down payment funds. FHA loans require downpayments from approved sources such as personal savings, cashed-in investments, bona fide gifts that meet FHA loan rules, etc. So what are the rules for earnest money paid for a home to be purchased with an FHA mortgage?
According to the FHA loan rules found in HUD 4155.1 Chapter Five, Section B, “The lender must verify and document the deposit amount and source of funds, if the amount of the earnest money deposit
• exceeds 2% of the sales price, or
• appears excessive based on the borrower’s history of accumulating savings.”
The good news is that earnest money funds don’t ALWAYS require scrutiny–as you can see from the rule above, if your earnest money falls under two percent or doesn’t appear excessive, you may have one less requirement to meet. For earnest money transactions that DO require the lender to look further, FHA loan rules spell out what is necessary to properly document the earnest money. According to Chapter Five, Section B:
“Satisfactory documentation includes
• a copy of the borrower’s cancelled check
• certification from the deposit-holder acknowledging receipt of funds, or
• separate evidence of the source of funds.”
Additionally, Chapter Five says, “Separate evidence includes a verification of deposit (VOD) or bank statement showing that the average balance was sufficient to cover the amount of the earnest money deposit at the time of the deposit.”
These verifications are meant to insure that the borrower has not used non-collateralized loans, credit card cash advances, or other non-approved sources to come up with a down payment or earnest money funds. For more information, speak to a loan officer about the acceptable sources of your down payment or earnest money.
Do you have questions about FHA home loans? Ask us in the comments section.