December 11, 2019

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Cash To Close And Earnest Money: FHA Loan Rules

All home loans have requirements for cash to close the deal, earnest money, and down payments. The FHA loan rules for these are found in HUD 4000.1, which has instructions to the lender on how to verify and process these payments.

For example, on page 296 of HUD 4000.1, we learn the following:

“The Mortgagee may only consider assets derived from acceptable sources in accordance with the requirements outlined below.
Closing costs, prepaid items and other fees may not be applied towards the Borrowers Minimum Required Investment” also known as the down payment.

Sources of cash to close and earnest money must be properly documented by the lender. FHA loan rules do not permit non-collateralized loans such as credit card cash advances or payday loans to be used for the purpose of meeting a down payment requirement, earnest money payment, or closing costs. When it comes to earnest money, HUD 4000.1 tells the lender:

“The Mortgagee must verify and document the deposit amount and source of funds if the amount of the earnest money deposit exceeds 1 percent of the sales price or is excessive based on the Borrowers history of accumulating savings, by obtaining:

– a copy of the Borrowers canceled check;
– certification from the deposit-holder acknowledging receipt of funds; or
– 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. If the source of the earnest money deposit was a gift, the Mortgagee must verify that the gift is in compliance” with FHA loan requirements for gift funds.

For cash to close, FHA loan rules state:

“The Mortgagee must document all funds that are used for the purpose of qualifying for or closing a Mortgage, including those to satisfy debt or pay costs outside of closing. The Mortgagee must verify and document that the Borrower has sufficient funds from an acceptable source to facilitate the closing.”

Borrowers are required to explain the sources of their down payment and earnest money, regardless of which approved sources that money comes from. Those sources include cash saved at home, savings and checking accounts, cash-in stocks or bonds, legitimate gifts from approved sources that have no repayment expectation, employer contributions, and many other sources.

In addition to FHA loan rules, individual lender standards may also apply, so it is best to have a conversation with a loan officer to determine what is required at a particular financial institution.

Joe Wallace - Staff Writer

By Joe Wallace

May 2, 2017

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 for (8) years and is currently the Associate Editor for

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About 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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