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FHA Loan Rules: A Reader Question About Earnest Money

February 27, 2014

108A reader asks, “A buyer made an application for a FHA loan to purchase a property. The buyer was not able to obtain FHA loan approval by close of escrow and rather than to cancel the contract and receive the earnest money back the buyer and seller agreed in writing to extend the contract’s close of escrow provided the earnest money become unrefundable if the buyer could not close escrow for any reason.”

“The buyer was not approved for FHA financing and cancelled the contract yet is claiming FHA overrides the written contract and FHA states the earnest money must be returned to the buyer when the buyer is denied aFHA loan. Does FHA have some sort of rule or authority over a legal contract between buyers and sellers for the earnest money? I can’t see how.”

The answer to this question is tricky–we can’t offer legal advice and the basic issue in this reader question could be legal in nature. There are instances where a government insured mortgage loan such as an FHA loan or VA mortgage loan has regulations that do override language in the contract that may violate the rules of the program or don’t meet its standards. We aren’t able to comment whether this is the case here.

However, let’s examine what FHA loan rules found in HUD 4155.1 have to say in general terms about sales contracts. According to Chapter Six Section A, under a heading called “Policy On Sales Contracts” we find the following:

“Except for houses sold by FHA under the REO program, FHA is not a party to the sales agreement.

When a sales contract contains conditions that, if performed, would violate FHA’s requirements, the lender must obtain an addendum or modification to the purchase agreement that allows conformance to those requirements. Nevertheless, failure to perform a condition of the sales contract is not grounds for denying loan endorsement, provided the loan closes in compliance with all regulations and policies. Example: The sales contract may require the seller to pay an amount in excess of present seller contribution limitations.”

Whether this applies to the reader question remains to be seen. The best course of action in this case is to contact the FHA directly at 1-800 CALL FHA and discuss the matter with a legal expert who knows real estate and/or contract law.

Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at FHA.com, a private company and not a government website.

Joe Wallace - Staff Writer

By Joe Wallace

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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