In a recent post we discussed FHA loan down payments and how the lender is required to verify that down payment money is coming from acceptable sources. Did you know the lender is also required to verify the sources of earnest money and funds to pay closing costs? It’s true-FHA home loan rules include requirements that these funds comply with FHA loan rules.
For example, if your earnest money comes to you in the form of a gift, those gift funds must meet the rules and requirements of the FHA Loan Handbook HUD 4000.1 section titled Gifts (Personal and Equity):
“Gifts refer to the contributions of cash or equity with no expectation of repayment.” This means your earnest money gift must never carry any strings attached. But that isn’t all-the sourcing of such gift funds is also important. From HUD 4000.1:
“Gifts may be provided by:
-the Borrower’s Family Member;
-the Borrower’s employer or labor union;
-a close friend with a clearly defined and documented interest in the Borrower;
-a charitable organization;
-a governmental agency or public Entity that has a program providing homeownership assistance to low or moderate income families or first-time homebuyers.”
HUD 4000.1 also says that the lender is 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”.
The lender may verify the earnest money deposit using a copy of the canceled check, a “certification from the deposit-holder acknowledging receipt of funds” or bank documentation which shows evidence that “the average balance was sufficient to cover the amount of the earnest money deposit at the time of the deposit”.
When it comes to the money you pay for closing costs, HUD 4000.1 states:
“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.”