October 24, 2021

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FHA Loans and Earnest Money: A Reader Question


A reader asks, “I have a property listed and in escrow with an FHA buyer who was so confident that she would get the loan (the lender provided a fully approved letter, contingent on final review and appraisal), that she agreed to unconditionally release the EMD to my seller.”

“Long-story-short, the buyer decided that in light of suspicions that she might not be approved in the final review, she would cancel the loan process and kill the deal. Now she wants her released EMD back and her agent claims there are FHA regulations that demand the return. I cannot find them. Do they exist? What do they say?”

The reader doesn’t specify, but we assume the acronym “EMD” stands for “earnest money deposit”. With that in mind:

This is a tricky question to answer because it involves legal issues, contract language, and possibly the laws of your state depending on the circumstances of the cancellation of the home loan transaction.

A quick search of HUD 4155.1, which sets out many of the rules covering FHA home loan transactions for the lender, reveals only rules covering the source of earnest money.

In our research to answer this question, we found advice from lawyers that indicated a possibility of earnest money forfeiture in cases where the loan transaction was cancelled for reasons other than abeing denied the loan by the lender. However, we cannot offer legal advice and offer this as anecdotal information only.

The best course of action for this particular reader is to contact the FHA directly to get information on FHA loan earnest money refund policy based on the specifics of the situation–which may include additional information not given in the reader question that may have bearing on the case.

For example, was the borrower turned down for the loan at any time? Or did the process get stopped before a determination was made? Did the sales contract specify how and when earnest money would be forfeited and under what circumstances? Does state law have anything to say on the transaction in such cases?

These are details we arent’ privy to here, and so we refer the reader to the FHA: 1-800 CALL FHA.

Do you have questions about FHA home loans? Ask us in the comments section.

Joe Wallace - Staff Writer

By Joe Wallace

October 30, 2014

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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FHANewsBlog.com was launched in 2010 by seasoned mortgage professionals wanting to educate homebuyers about the guidelines for FHA insured mortgage loans. Popular FHA topics include credit requirements, FHA loan limits, mortgage insurance premiums, closing costs and many more. The authors have written thousands of blogs specific to FHA mortgages and the site has substantially increased readership over the years and has become known for its “FHA News and Views”.

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