Everything You Need To Know About Earnest Money for VA Home Loans

Buying a home is an exciting time, but it can also be stressful especially when it comes to finances. One term that often comes up during the homebuying process is “earnest money.” If you’re using a VA home loan to purchase your home you may be wondering whether you need to provide earnest money and how it works. In this comprehensive guide, we’ll explain everything you need to know about earnest money for VA home loans.

What is Earnest Money?

Earnest money, also known as a good faith deposit, is a sum of money buyers put down to show sellers they are serious about purchasing the home. It is paid after an offer is made on a home but before closing.

The earnest money is held in an escrow account until closing. At closing, it generally goes toward the down payment or closing costs With a VA loan, since there is no required down payment, the earnest money usually goes toward closing costs.

Earnest money shows the seller that the buyer is financially committed to purchasing the home. It provides the seller with a level of assurance that the buyer won’t walk away for no reason.

How Much Earnest Money Should I Put Down with a VA Loan?

The amount of earnest money required can vary greatly depending on factors like the local real estate market conditions and the price of the home. There are no hard and fast rules.

Here are some general guidelines on earnest money amount:

• 1-2% of the purchase price – This is a typical earnest money amount in moderately competitive markets For a $300,000 home, this would equal $3,000 – $6,000

• Up to 3-5% in hot markets – When demand exceeds supply, buyers may need to put down more earnest money to make their offer stand out. For a $300,000 home, this would equal $9,000 – $15,000.

• $500 – $2,000 flat fee – For lower priced homes or when demand is low, a flat fee in this range may suffice.

Talk with your real estate agent to get a feel for what is customary in your local market. Remember, the earnest money shows the seller you are serious, but you don’t want to commit more than you can afford to lose.

Is Earnest Money Required for a VA Loan?

The VA itself does not require buyers to put down earnest money. However, many sellers expect it as part of an offer. Not including earnest money could put you at a disadvantage compared to other buyers.

Here are some things to keep in mind regarding earnest money and VA loans:

• Your lender cannot require earnest money. But the seller may request it.

• Including earnest money can strengthen your offer, especially if supply is low and demand is high.

• VA loans provide special contingencies that protect your earnest money if the deal falls through.

So while earnest money is not mandatory, it’s generally advisable to include an amount that aligns with local norms and the specifics of the deal. A strong real estate agent can provide guidance on this.

Is Earnest Money Refundable with a VA Loan?

One of the great benefits of VA loans is that they provide protections for your earnest money deposit if you are unable to close on the home. VA loans have automatic contingencies that allow buyers to get their earnest money back if certain conditions are not met.

Here are some common contingencies that can enable you to get a refund of earnest money with a VA-backed loan:

• Appraisal Contingency – If the appraisal value comes in lower than the purchase price, the buyer can walk away and get the earnest money back.

• Inspection Contingency – If issues are found during the inspection, the buyer can terminate the contract and receive a refund of earnest money.

• Financing Contingency – If the buyer fails to secure financing in time, the earnest money is returned.

• Home Sale Contingency – Buyers can back out if they are unable to sell their current home in time.

As long as the contract includes these standard contingencies, VA buyers are well protected if they need to walk away for legitimate reasons. Be sure to review the contingencies with your real estate agent.

What Happens to Earnest Money at Closing?

Assuming the sale closes as planned, the earnest money will go toward the buyer’s closing costs and down payment.

With a VA loan, there is no required down payment, so buyers can count on getting credited for the full earnest money amount at closing. It helps lower the out-of-pocket cash needed at closing.

Any earnest money deposit that exceeds the closing costs will go back to the buyer. For example, if you put $5,000 in earnest money down and your closing costs are $4,000, you would get $1,000 back at closing.

Can I Lose My Earnest Money with a VA Loan?

While VA loans provide excellent protections, it is possible to lose your earnest money deposit if you simply change your mind and back out of the deal without cause.

If the seller has fulfilled the contract terms and you terminate the agreement without one of the valid contingencies being triggered, the earnest money can be turned over to the seller.

This is why it’s so important to work with an experienced real estate agent on the purchase agreement terms. You want to ensure you have the necessary contingencies in place in case issues arise.

Key Takeaways on Earnest Money for VA Loans

• Earnest money shows sellers you are serious and financially committed to buying their home. It can give your offer an edge.

• While not required, most sellers expect 1-5% of the purchase price as earnest money. Check local norms.

• VA loans have built-in contingencies that allow you to get your earnest money back if you’re unable to close.

• At closing, earnest money goes toward your closing costs. Any leftover amount gets refunded to you.

• Don’t commit more earnest money than you can afford to lose in case you need to back out.

Buying a home is a big commitment. By understanding how earnest money works with a VA loan, you can make a competitive offer with confidence. Partner with a trustworthy real estate agent and lender to ensure your VA loan experience goes smoothly.