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.
Putting down earnest money is a common part of making an offer on a home even when using a VA loan. But what exactly is earnest money how does it work with VA loans, and how much should you put down? This comprehensive guide will explain everything you need to know about earnest money deposits when buying a home with a VA loan.
What is Earnest Money?
Earnest money, also known as a good faith deposit, is a sum of money buyers put down to demonstrate to the seller that they are serious about purchasing the home. It acts as a security deposit of sorts to reassure the seller that the buyer intends to follow through with the purchase.
When a seller accepts an offer they take the home off the market. This can be risky for them if the deal falls through. The earnest money provides some protection in case the buyer decides to walk away.
The typical earnest money deposit is 1-3% of the purchase price. In hot markets where competition is fierce, buyers may need to put down more earnest money to make their offer stand out. If the deal closes, the earnest money goes toward the down payment or closing costs.
Do You Need Earnest Money for a VA Loan?
VA loans do not require an earnest money deposit. However, individual sellers may request that buyers include earnest money with their offers. This is fairly common, even with VA loans, as it reassures sellers that the buyer is financially prepared to move forward.
Before accepting an earnest money deposit, the lender or VA will verify that the funds come directly from the buyer rather than being gifted or borrowed. As long as the source can be verified, earnest money can be used with a VA loan.
Should You Offer Earnest Money on a VA Loan?
While not required, earnest money can give buyers an important edge when making an offer in a competitive housing market. When demand exceeds supply, sellers have their pick of multiple offers on their home. Earnest money shows them you are a serious, motivated buyer who is ready to move quickly.
If you do end up closing on the home, the earnest money also reduces the amount you need to come up with at closing for the down payment and fees. Any amount you put down upfront lowers the total cash needed.
Pros and Cons of Earnest Money with VA Loans
Before deciding whether to offer earnest money, weigh the potential advantages and disadvantages:
Pros:
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Shows seller you are committed to buying the home
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Can make your offer stand out over others
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Puts you in a better position to negotiate terms
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Lowers amount needed at closing if applied to down payment/fees
Cons:
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Risk of losing the money if you back out for reasons not specified in contract
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Must closely follow all deadlines and contract terms
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Need to continually reevaluate desire to purchase home
How Much Earnest Money to Offer on a VA Loan?
There are no set rules for how much earnest money to offer. The typical amount ranges from 1-3% of the purchase price. However, specific factors like market conditions and property type impact the ideal deposit amount:
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Competitive markets – Buyers may need to put down 5% or even 10% earnest money on offers to stand out.
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Non-competitive markets – 1% or a flat $500-$2,000 may be sufficient in buyer-friendly markets.
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New construction – Builders often request higher deposits around 10% for new construction homes.
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Existing homes -Plan on 1-3% for resale homes depending on competition.
Work with a real estate agent experienced in your local market to determine the right earnest money amount for your specific situation. You want enough to show you are serious, but not so much it puts your finances at risk.
Is Earnest Money Refundable with a VA Loan?
Whether or not you get the earnest money back if a deal falls through depends on the contract terms. Most purchase agreements contain contingencies allowing buyers to back out for certain reasons without forfeiting the deposit.
Common contingencies that can protect your earnest money include:
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Home inspection contingency – Lets you walk if inspection reveals undisclosed problems.
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Appraisal contingency – Built into VA loans. Refunds earnest money if appraisal is lower than purchase price.
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Financing contingency – Refunds earnest money if buyer can’t secure financing in time.
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Home sale contingency – Lets you back out if you can’t sell your current home first.
Just make sure not to waive critical contingencies in competitive markets. Work with an experienced real estate agent to ensure your contract properly protects your earnest money.
The Bottom Line
While not required, an earnest money deposit can strengthen your offer when buying a home with a VA loan. It signals to sellers you are serious and ready to move forward. In hot markets, a sizable deposit may be necessary to edge out competition. Work with an agent to determine the right amount for your market and situation.
Tips for Offering Earnest Money with a VA Loan:
- Verify funds are from your own accounts, not gifts or loans
- Be ready to document source of earnest money for lender
- Ask real estate agent for typical deposit amount in your area
- Ensure contract has protections like inspection contingency
- Don’t waive critical contingencies just to compete
- Use earnest money to negotiate for seller concessions
- Apply deposit toward closing costs or down payment at closing
Whether you choose to put down earnest money or not, VA loans remain a fantastic option for military homebuyers. Be sure to weigh the pros and cons as you make an informed decision. With preparation and guidance from an experienced real estate pro, you can strategically use earnest money to your advantage in competitive markets when buying a home with a VA loan.
How much earnest money should I put down?
The earnest money amount will vary according to your area, seller, and price of the home youre considering. The best way to determine local customs is to talk to an experienced real estate agent. Your earnest money deposit could range anywhere from 1-3 percent for an existing home to 10 percent for new construction. It depends on the specific property, the competitiveness of the market, and other market-specific factors. For example, on a $300,000 property, you may put down $3,000. For new construction, as much as 10 percent can be required, which would come out to $30,000 in this case.
A competitive market might mean you’ll need to put down more money. Most agents agree that buyers should include an earnest money amount that will be taken seriously, but not so much that a buyer’s finances are at risk. It’s unlikely that you’ll lose your earnest money deposit, but it’s important to protect yourself.
Consider the following when asking how much to put down:
- The state of the local and national housing market.
- How quickly you can close the deal.
- How eager is the seller?
- If youre making an offer without any competition, put down about 1% of the offering price on the home.
- If youre making an offer and know other people are looking at the home, consider putting down roughly 1-5%.
- A flat fee ranging from $500 to $2000 might be acceptable depending on the home.
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 is Earnest Money? Do you need it with VA loans?
FAQ
Does a VA loan require earnest money deposit?
What is a good faith payment on a VA loan?
Can a VA buyer get money back at closing?
Who keeps earnest money at closing?