May 2, 2024
There are many different types of home loans, but most of them have one thing in common: the need to use home loan earnest money as a serious buyer. You don’t have to save or plan for earnest money when you are preparing for a home loan, but it is a bad idea not to, as we examine below.
Earnest Money Defined
Fannie Mae has an article on its official site discussing the nature of earnest money. That discussion includes the following:
“Buyers demonstrate their commitment to purchasing a home by submitting an earnest money deposit. This money is held temporarily in an escrow account along with their offer.”
NerdWallet.com also rings in, saying “Earnest money is a good-faith deposit you make on a home to show the seller you’re serious about buying.”
Earnest money is deposited once the seller has accepted your offer and “is usually kept in an escrow account. When the sale closes, you can keep the cash or apply the money toward the purchase.”
Earnest money is not an FHA loan requirement. That said, borrowers do well to budget for and set aside earnest money totalling between 1% and 3% of the asking price of a house.
Serious buyers typically use earnest money when negotiating, making it harder for those without earnest money, especially in a more competitive housing market.
Who Gets Your FHA Loan Earnest Money?
Does earnest money go to the seller? Typically not. Depending on the nature of your transaction, you may find this cash is applied toward closing costs or the home loan down payment.
Losing Earnest Money
If you break the terms of your purchase agreement, your earnest money could be forfeited to the seller. However, you can insert contingency clauses into the agreement to avoid this forfeiture.
A good example can be found in situations where the house appraises lower than the asking price. With an FHA mortgage, you can walk away from the transaction without losing your earnest money.
There is a rule that requires this in HUD 4000.1, the FHA Single-Family Lender’s Handbook. It assumes–and requires–the contingency clause even if it’s not physically present in the FHA loan agreement.
There are other options. If the home inspection doesn’t go well a borrower may choose to cancel a deal–can they do so without losing their earnest money?
That refund is never guaranteed UNLESS you negotiate an inspection contingency clause into your purchase agreement. That is a common practice, don’t be afraid to ask.
Do not assume you have the ability to drop the transaction and walk away without losing earnest money UNLESS you have a contingency clause that covers the reason you want to do so.
Contingency clauses can be inserted into most home loan purchase agreements. They typically cover an issue such as the outcome of an appraisal which is a contingency clause required by the FHA.
They can also cover inspections, and there is also a contingency clause making the purchase of the home dependent on the sale of the borrower’s old home.
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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