June 19, 2024
FHA home loans have a down payment requirement, the same as many other home loans. Earnest money is also an important early financial consideration.
Planning and saving for both are part of the loan process, and you want to start as early as possible. Below, we examine some common issues related to both down payments and earnest money.
What To Know Earnest Money And Down Payment Money
Earnest money is paid at offer time. You do not pay earnest money at closing time. A down payment is made on closing day in addition to closing costs.
Earnest money is paid into an escrow account. In the event that an FHA loan is canceled, the earnest money may be refunded to the borrower in the right circumstances, such as when the home is appraised and valued lower than the sale price of the property.
If the borrower chooses to walk away from the deal, a refund of the earnest money in escrow is due in these circumstances.
What To Remember About FHA Loan Down Payments
FHA down payments must come from approved sources. Those funds are required by law to undergo a verification process, and they cannot come from unapproved sources like non-collateralized loans.
At closing time, you will make the down payments according to the lender’s instructions. Typically, you cannot use a personal check or hard cash to make payment.
FHA borrowers who accept down payment assistance funds and those who get down payment gifts from friends or family should know the lender needs time to verify the source of those funds.
All down payment funds must be reviewed. If you accept outside funds for a down payment, coordinate with the participating FHA loan officer.
If you struggle to save a down payment, consider FHA loan options that can help.
Some borrowers choose to negotiate with the seller to get a 6% seller concession on closing costs. Financing the FHA Up-Front Mortgage Insurance Premium instead of paying it in cash at closing time is another way to free up money for the down payment.
FHA Loan Co-Borrowers
Co-borrowing is another option to consider. This is an arrangement where two borrowers or more agree to be financially obligated on the mortgage. This isn’t the same as agreeing to be a co-signer. When you co-borrow, at least one of the borrowers obligated on the FHA mortgage must occupy the home as their main address.
Two or more borrowers can apply for an FHA mortgage and potentially share the down payment. The same rules for verifying the down payment funds apply.
And buying a home together isn’t necessarily a permanent arrangement. Did you know that co-borrowers who apply for FHA loans together can refinance to remove one borrower from the loan later on? That’s a handy option to consider.
In this scenario, FHA borrowers should decide in advance what to do if one of the owners wants out of the arrangement.
Should the owner buy out the co-borrower for the amount of the original downpayment to avoid potential disputes later on? That depends greatly on the circumstances, but making a plan is never a bad idea.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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