June 5, 2018
When it’s time to get serious about a home you want to buy with an FHA mortgage loan, the payment of earnest money is an important step toward owning the property.
FHA loan rules have specific requirements for earnest money deposits; like other payments associated with your home loan transaction, there are requirements for the payment and sourcing of these funds.
The FHA Loan Handbook, HUD 4000.1, explains that the lender is required to verify and document the borrower’s earnest money deposit including the amount and the source when the earnest money exceeds one percent of the sales price or, as HUD 4000.1 explains, “is excessive based on the Borrower’s history of accumulating savings”.
In such cases the lender must obtain:
- A copy of the borrower’s canceled earnest money check;
- Documentation from the deposit-holder acknowledging receipt of the funds to be used as earnest money; or
- A Verification of Deposit or other bank statement showing that the average balance was “sufficient to cover the amount of the earnest money deposit at the time of the deposit” according to HUD 4000.1.
FHA loan rules permit the borrower to pay earnest money that was given to the borrower as a gift, but HUD 4000.1 has requirements for gift funds, which may be provided by one of the following:
- Family Members;
- Employers or labor unions;
- Friends with “a clearly defined and documented interest in the Borrower”
- Charitable organizations;
- Government agencies or public entities providing homeownership help to families with a financial need or first time home buyers.
Gift funds for earnest money deposits must not come with strings attached or expectations of repayment. The borrower must be in receipt of a bona fide gift.
In all cases, FHA loan rules may be supplemented by state law, lender standards, or other requirements. FHA loan guidelines cannot override state law or other regulations.
Borrowers with sources of earnest money down payments that do not meet the FHA minimum standard, state law, or lender requirements may experience a delay in loan approval or closing where applicable until an appropriate source of such funds is obtained.
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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