earnest money and closing cost rules?


Borrowers don't usually know this, but lenders are required to verify where earnest money and closing costs come from. These FHA requirements are outlined HUD 4000.1, otherwise referred to as the Single Family Housing Policy Handbook.

It's sometimes the case that homebuyers are able to afford to buy a home when family chips in to help with the costs. Gifts are permissible, as long as the come from family members, employers or labor unions, close friends, charitable organizations, or government agencies and public entities providing homeowner assistance.

We  are also required to "verify and document the deposit amount and source of funds” if the earnest money deposit is greater than one percent of the sales price or, "is excessive based on the Borrower’s history of accumulating savings." Verification can be done using a cancelled check, but may also require bank documentation demonstrating an average balance was sufficient to cover the earnest money amount a the time of the deposit.

These rules are in place so that lenders and FHA can see that a borrower is in the proper financial position to afford a home. In the past, some down payment assistance programs were providing homebuyers with a way to qualify for an FHA loan, but left them with overvalued homes they could not afford to keep. FHA-insured loans are intended for qualified borrowers who can demonstrate a good credit history and the ability to repay their debt