An earnest money deposit is a deposit of good faith on a home loan from a buyer to a seller. Including an earnest money deposit with your offer is a part of the VA home loan process and serves to protect VA buyers and sellers in a real estate transaction. Learn how earnest money might help you obtain the home you want.
Buying a home is an exciting but often stressful endeavor. As a veteran or servicemember using your VA home loan benefit, you want the process to go as smoothly as possible. One question that often comes up is whether you need to put down an earnest money deposit when purchasing a home with a VA loan.
Earnest money is a deposit paid by the buyer to the seller to demonstrate a serious intent to purchase the home It is considered a good faith gesture and shows the seller you are committed to following through with the purchase.
While earnest money is not required for a VA loan, it can be to your advantage in certain situations. Keep reading to learn everything you need to know about earnest money deposits and VA loans.
What Is Earnest Money?
Earnest money, sometimes called a good faith deposit, is money paid by the buyer upfront when making an offer on a home. It is held in an escrow account until closing.
The earnest money deposit is intended to show the seller you are serious about purchasing their home. It provides some assurance to the seller that you won’t back out of the deal.
Typical earnest money amounts range from 1-3% of the purchase price, but can be negotiated between buyer and seller For example, on a $300,000 home, earnest money might be in the range of $3,000 – $9,000
If the deal goes through the earnest money is credited to the buyer at closing and goes toward the down payment or closing costs. If the buyer backs out the seller usually gets to keep the earnest money.
Is Earnest Money Required for a VA Loan?
The short answer is no – earnest money deposits are not required to obtain a VA loan. The VA loan program does not have any rules or regulations requiring buyers to put down earnest money.
Earnest money is an agreement between buyer and seller, not something mandated by mortgage lenders or the VA. So whether or not you need to put down earnest money depends on the specific circumstances of your home purchase.
Certain sellers may require an earnest money deposit, especially in competitive housing markets where they get multiple offers. But it is not universally required. Many VA loan transactions close each year without the buyer putting down any earnest money.
When to Offer Earnest Money with a VA Loan
Although not required, there are times when offering earnest money can benefit you as the buyer:
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Competitive markets – When bidding on a home against multiple offers, earnest money can give you an edge over other buyers by demonstrating your serious intent.
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Contingent offers – If making your offer contingent on the sale of your current home, earnest money shows the seller you have skin in the game.
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Demand from seller – Some sellers simply won’t consider an offer without earnest money, giving you little choice if you want the home.
The amount of earnest money to offer is negotiable. Paying more earnest money than competing buyers is one strategy to make your offer stand out. Just be sure the amount fits comfortably within your overall budget.
Earnest Money Deposit Logistics with a VA Loan
If you decide to put down earnest money, here are some key things to keep in mind:
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The earnest money deposit cannot come from loan proceeds. It must come directly from you, the buyer. The VA will require documentation showing the source of funds.
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The earnest money check is written out to the title company or real estate brokerage, not directly to the seller. It is held in an escrow account until closing.
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Be sure to include earnest money contingency clauses in the purchase agreement to get your deposit back if issues arise with home inspections, appraisal value, or loan approval.
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Connect with your lender upfront to ensure your earnest money documentation meets any VA requirements.
By understanding the logistics, you can avoid hassles and make sure your earnest money deposit serves its purpose in strengthening your offer.
Earnest Money Returned or Forfeited
What happens to the earnest money deposit if the home purchase falls through? There are a few possible scenarios:
Buyer defaults – If you as the buyer back out for no valid reason, the seller keeps the earnest money deposit as compensation for taking their home off the market. Make sure you are fully committed before putting down earnest money.
Seller defaults – If issues arise on the seller’s end, such as failure to provide clear title, you are entitled to get the earnest money deposit back.
Contingencies – Earnest money is generally refunded to the buyer if you exercised contingencies in the purchase agreement, such as:
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Home inspection finds significant defects
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Appraisal comes in lower than purchase price
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Buyer is unable to secure financing
By including appropriate contingencies in the contract, you can get your earnest money back if major issues crop up through no fault of your own.
Mutual agreement – Buyer and seller may mutually agree to cancel the contract and release the earnest money, for example if there are irreconcilable differences during negotiation.
Litigation – If buyer and seller dispute what to do with the earnest money, the issue may have to be resolved through litigation. This underscores the importance of having a detailed, well-written purchase agreement.
Being clear on the terms under which earnest money is returned or forfeited can prevent misunderstandings down the road.
Pros and Cons of Earnest Money with a VA Loan
Below is a summary of some key pros and cons to keep in mind when deciding whether to put down an earnest money deposit:
Pros
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Shows seller you are serious and committed
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Can give your offer an advantage in competitive purchase situations
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Applied toward down payment and closing costs at closing
Cons
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Not getting earnest money back if you need to cancel
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Tying up extra funds during the transaction
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Potential hassles with documentation and tracking
For many VA loan buyers, the benefits of offering earnest money in the right situation can outweigh the drawbacks. But consider your specific circumstances carefully.
Partner with an Experienced Lender
Purchasing a home involves many moving parts. Having a trusted VA lender as your partner makes the process smoother.
The experts at [Company] are here to guide you through every step of your VA loan. We’ll explain key details like earnest money deposits to help you make informed decisions.
Connect with us today to get started on making your homeownership dreams a reality!
What happens to earnest money if the buyer backs out?
Buyers stand to lose their earnest money if they back out of a real estate transaction. Earnest money gives sellers monetary assurance that a buyer won’t back out of the contract without valid cause.
What Happens to Earnest Money at Closing?
Earnest money funds are usually applied to a loan’s closing costs or to the down payment. Since VA loans don’t require a down payment and closing costs are normally paid by the seller, many VA loan recipients end up putting that money toward closing costs and prepaid items or even getting it all back.
Keep in mind that as a buyer, you want to gain as many seller concessions as possible from the seller. The best way to start any relationship is with a showing of goodwill. An ample deposit serves this purpose, and places buyers in a great position to negotiate more favorable contract terms.
What is Earnest Money? Do you need it with VA loans?
FAQ
Do you pay earnest money with a VA loan?
Do you lose earnest money if you back out?
What must the seller pay on a VA loan?
Who keeps earnest money at closing?
Does a VA loan have earnest money?
Since earnest money is typically applied to down payments and closing costs, the VA must ensure the money comes directly from the borrower. An earnest money deposit with a VA loan minimizes the buyer’s risk. When you purchase a home, you often don’t think about all the things the buyer has to do to sell their home.
What is an earnest money deposit on a VA home loan?
An earnest money deposit is a deposit of good faith on a home loan from a buyer to a seller. Including an earnest money deposit with your offer is a part of the VA home loan process and serves to protect VA buyers and sellers in a real estate transaction. Learn how earnest money might help you obtain the home you want. What is earnest money?
Do VA loan homebuyers get their earnest money deposit back?
At closing, VA loan homebuyers have options regarding the fate of their earnest money deposit. In many cases, the funds are applied to the loan’s closing costs or down payment. However, since VA loans do not require a down payment and closing costs are often paid by the seller, VA homebuyers will often receive their full earnest money deposit back.
What are the guidelines for earnest money deposits & VA loans?
Learn the guidelines for earnest money deposits and VA loans to ensure you are making the right decisions. Earnest money, sometimes called a good faith deposit, is a sum of money you put down to show the seller that you are serious about purchasing the home. There is no science as to how much money you should put down in your earnest money deposit.