Equity Resources, Inc. Policy on Earnest Money Deposits - effective 8/1/14
Purchase contracts typically have some money noted as an earnest money deposit. This money is used as
“good faith” money that the buyer will go through with the transaction. The earnest money deposit made by
the borrower can be used towards the down payment of the home. The earnest money does not have to be
used towards the down payment and can be removed from the 1003. The decision to remove earnest
money from the transaction should be the customer’s decision. The customer may be relying on having that
credit on the HUD1 at closing, so never remove earnest money from the transaction to make it easier,
without discussing it first with the customer. Read guidelines for each type of loan below because removing
the earnest money from the transaction may not be necessary. The purchase contract does not need to be
updated when earnest money is not being used.
On Conventional, USDA and VA transactions, if the earnest money deposit is being used as part of the cash
to close, then the earnest money must be verified and will show as a credit on the 1003 and HUD1.
On FHA transactions, if the amount is under 2% of the purchase price and less than 25% of total monthly
income, you do not need any verification of the earnest money and the earnest money can appear on the
1003 and HUD1 as a credit. If the amount is over 2% and/or over 25% of total monthly income, you will
need to verify the earnest money. The 25% income test was set up by Equity Resources to define the words
“appears excessive” in HUD’s policy that says “appears excessive based on the borrower’s history of
accumulated savings” and to require proof of earnest money consistently from transaction to transaction.
Steps that need to be taken if you are NOT using the earnest money as a credit on the 1003 or HUD1 for all
loan types:
1. The loan officer must notify their processor that they are not using the earnest money as a credit
2. The processor will remove the earnest money from the 1003.
3. Processor will put a note on their submission to underwriting that earnest money is NOT being used
towards cash to close.
4. Underwriter will add a closing stip “earnest money to be returned on HUD1 and not listed as a credit
on the HUD1”
5. No proof of earnest money is required and no LOX will be required.
6. We will NOT require an updated purchase contract.
Steps that need to be taken if you ARE using the earnest money:
1. Ask the Realtor for the copy of the check received for the earnest money deposit or get a copy of
the cleared earnest money deposit check from the customer. You must get a cleared copy of the
check if you CANNOT see that the money has been removed from the bank account using the bank
statements.
2. Enter the earnest money on the 1003
3. If the earnest money has not cleared the borrower’s account (based on information provided), enter
the earnest money on the 1003 as earnest money and reduce the bank balance by the amount of
the earnest money
4. Run the AU and verify earnest money in accordance with the findings.
THE FOLLOWING PAGES SHOW THE ACTUAL POLICIES FOR EACH LOAN TYPE.
Conventional transactions
If the earnest money deposit is being used as part of the cash to close, then the earnest money must be
verified and will show as a credit on the 1003 and HUD1
DU FINDINGS READ:
Conventional guidelines:
FHA transactions - Verify earnest money when the amount exceeds the purchase price by 2%
and/or if the earnest money is over 25% of total monthly income. It is not necessary to verify the earnest
money on all transactions. The earnest money will continue to show as its own line item on the 1003 asset
and as a credit on the HUD1, even when not verified.
Example: On a $100,000 purchase price if the earnest money exceeds $2000, then the amount would need
to be verified in accordance with FHA requirements.
Example: On a $100,000 purchase and the earnest money is less than $2000, then you need to see if your
earnest money meets the income test. The earnest money in this example is $1500. The income in this
example is $3425. The income test is the amount of the earnest money divided by the total monthly income.
In this example $1500/3425 = 43.8%. You WOULD need to verify earnest money even though the amount is
only 1.5% of the purchase price.
Does HUD require verification of earnest money?
If the amount of the earnest money deposit exceeds 2 percent of the sales price or appears excessive based
on the borrower's history of accumulating savings, the lender must verify with documentation the deposit
amount and the source of funds. Satisfactory documentation includes
• A copy of the borrower's cancelled check, or
• A certification from the deposit-holder acknowledging receipt of funds and separate evidence of the source
of funds is also acceptable, or
• Evidence of source of funds including a verification of deposit or bank statement showing that at the time the
deposit was made the average balance was sufficient to cover the amount of the earnest money deposit.
USDA transactions - Typically on a USDA transaction, earnest money is returned to the
borrower on the HUD1 and does not need verified because the borrower is not bringing any cash to closing.
If the borrower does bring money to closing, we can verify the earnest money through a copy of the cleared
check or a copy of the bank statement showing the earnest money cleared the account.
If the borrower has sufficient assets without verifying the earnest money, the underwriter can add a closing
stip: ”earnest money to be returned on HUD1 and not listed as a credit”.
USDA guidelines:
Earnest money deposit on the sales contract can be considered an asset if the deposit is not already reflected in a liquid
asset account. If the funds have cleared the applicant’s account, place the amount as an “Other Credit” in Section VII of
the loan application. For GUS transactions, lenders should only enter the earnest money once; on either the “Asset and
Liabilities” or the “Transaction Details” page.
VA transactions - Typically on a VA transaction, earnest money is returned to the borrower on
the HUD1 and does not need verified because the borrower is not bringing any cash to closing. If the
borrower does bring money to closing, then we can verify the earnest money through a copy of the cleared
check or a copy of the bank statement showing the earnest money cleared the account.
If the borrower has sufficient assets without verifying the earnest money, the underwriter can add a closing
stip: ”earnest money to be returned on HUD1 and not listed as a credit”.
VA guidelines:

VA does not impose limits on EMD

If funds are considered as part of Veteran's overall assets, then EMD must be verified