When you buy a home, putting down earnest money shows the seller you’re serious about the purchase. But lenders don’t just accept this deposit at face value—they perform earnest money verification to trace the source and legitimacy of your funds. This step is essential to protect all parties involved in the transaction.
What Is Earnest Money?
Earnest money is a good faith deposit made with your offer to buy a home. It’s held in a neutral third-party account, often an escrow account, until closing. This deposit signals your commitment and is usually applied toward your down payment or closing costs if the sale completes.
Why Earnest Money Verification Matters
Lenders must verify earnest money for two key reasons:
- Preventing Fraud: Federal laws like the Patriot Act require lenders to confirm the source of large deposits to prevent money laundering and fraud.
- Confirming Your Financial Standing: Lenders ensure the earnest money isn’t a hidden loan, which would increase your debt-to-income ratio and affect your mortgage approval. For more on this, see our detailed Debt-to-Income Ratio entry.
How the Verification Process Works
- You provide your earnest money via personal check, cashier’s check, or wire transfer to the escrow company.
- The lender requests documentation proving these funds came from your personal accounts.
- You submit bank statements showing the money was “sourced and seasoned,” meaning it has been in your accounts for at least 60 days.
Key Documents Required
Lenders typically require:
- Bank statements covering the last two months to show the funds were in your account prior to the deposit.
- A copy of the cleared check or wire transfer receipt confirming payment to the escrow agent.
- If funds are gifted, a gift letter signed by the donor along with their bank statements to verify the source.
Avoid cash deposits or last-minute fund transfers, as these raise red flags with underwriters.
Common Pitfalls to Avoid
- Using cash for deposits, which lenders cannot trace.
- Writing checks without sufficient funds, risking a bounced check.
- Omitting a gift letter when using gifted funds.
- Making large account deposits shortly before closing without explanation.
Earnest Money vs. Down Payment
While earnest money is your initial good faith deposit, it is separate from your down payment, though it typically applies toward it at closing.
Learn More
For a broader understanding of escrow accounts, visit our article on Escrow Accounts. To understand how gift funds work in mortgage processing, see Mortgage Gift Funds.
Authoritative External Resource
For official guidance, consult the Consumer Financial Protection Bureau’s explanation of earnest money deposits.
By preparing your documents carefully and following these guidelines, you can ensure a smooth earnest money verification process and keep your home purchase on track.
