Earnest Money and FHA Loans
Earnest Money as Defined by the Consumer Financial Protection Bureau (CFPB)
CFPB agrees with the above. “Earnest money is a deposit a buyer pays to show good faith on a signed contract agreement to buy a home. The deposit is held by a seller or third party like a real estate agent or title company.” You’ll want to budget and save for earnest money as early as you can in the FHA loan planning stages.
Once the house is sold and the closing day comes, CFPB notes, “the earnest money may be applied to closing costs or the down payment. If the contract is terminated for a permissible reason, the earnest money is returned to the buyer.”
There is also an FHA loan “escape clause” which forbids refusing to refund earnest money in situations where the appraised value of the home is lower than the asking price and the borrower chooses to walk away from the deal.
And in a case where a buyer does not act in good faith, “the earnest money may be forfeited and paid out to the seller.”
How Much Earnest Money Is Needed for an FHA Loan?
The minimum down payment for an FHA loan is 3.5%. The earnest money you put up for a home loan may be a few hundred dollars in some cases (depending on the seller and other variables) or it could require you to pay a sum between 3 and 5% of the sale price.
The actual amount may vary from loan to loan depending on the price of the home and the type of loan. You should talk to your lender about how much they require and what they recommend. In some cases, the seller may require more earnest money than the lender requires or vice versa.
When budgeting for earnest money, don’t forget you will also need to save up for closing costs, typically 2-5% of the home's purchase price.
Saving up for a down payment and closing costs can be difficult, especially if you are a first-time home buyer. Several programs can help you with this, including grants, loans, and tax credits. Talk to your lender about what options are available to you, especially from down payment and closing cost assistance programs in your local area.
Canceling the Sale and Earnest Money Refunds
The amount of time a buyer has to cancel a contract and get their earnest money back is typically around three days, but this can vary depending on state law and other factors.
It is essential to check with your real estate agent or attorney to find out what applies to your situation. If you are considering backing out of a deal after making an offer, you should make certain you are within your rights to do so. If not, what penalties will you pay? Knowing the options and the outcomes will help you make a better-informed decision about the loan.
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