A reader asks, “I’m buying a home for 160,000 and the seller is paying up to 4000 in closing costs and pre-paids (which the closing cost ended up only being 3,525 because the lender required me to pay for the appraisal outside of closing POC) I also put 500 earnest money down.”
“They are telling me that I have to bring 5,100 to closing instead of 4,625 because they said that I have to bring a total of 3.5% (5600) and the 475 that I already prepaid can not go towards my total 3.5% down. I thought that because I put 500 earnest money deposit and paid for the appraisal outside of closing and the seller is paying for all my closing costs, that I would be able to use the 475 as part of my 3.5%.”
FHA loans require both payment of closing costs and a down payment, which is considered a separate cost. Closing costs and other expenses cannot be counted as part of the down payment which is a minimum of 3.5% of the adjusted property value.
This is addressed in HUD 4000.1, page 155, which covers both the total required investment for the borrower and the minimum required investment, also known as the down payment:
“i. Total Required Investment
Total Required Investment refers to the amount the Borrower must contribute to the transaction including the Borrowers downpayment and the Borrower-paid transaction costs. The Total Required Investment includes the Minimum Required Investment (MRI).
ii. Minimum Required Investment
Minimum Required Investment (MRI) refers to the Borrowers contribution in cash or its equivalent required by Section 203(b)(9) of the National Housing Act, which represents at least 3.5 percent of the Adjusted Value of the Property.”
Later, starting on page 210, we learn FHA policy on whether or not it is possible to use closing costs as part of the borrower’s down payment. “Closing costs, prepaid items and other fees may not be applied towards the Borrowers Minimum Required Investment.” Borrowers should anticipate that the down payment will be required separately from closing costs including mortgage insurance premiums, appraisals, etc.
Earnest money should count toward the down payment, but it may be wise to have a conversation with the lender to see if that money was considered applied toward closing costs instead. State law and lender standards may apply, and individual circumstances may also factor in.
An initial reading of FHA loan rules in HUD 4000.1 don’t seem to specifically address the reader question with respect to how the earnest money is applied or possibly refunded at closing. This is a situation that could be affected by state law and/or lender standards, so the reader will need to further discuss the issue with the lender as it relates to earnest money and down payments.