Earnest Money Deposits and 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. However, for some guidelines, it truly depends on the real estate market and how desired your property is. For instance, if you are trying to purchase a house in a hot market with several serious buyers vying for the same home, you will likely need to put more money down.
Do You Need to Pay Earnest Money on a VA Loan?
No, VA loans do not necessarily require a down payment or an earnest money deposit. But, the seller might want this to consider you as a serious buyer. It’s not uncommon for sellers to request an earnest money deposit as part of the VA loan process.
Benefits of Earnest Money
Earnest money deposits not only show sellers that you are serious about purchasing the home, but they also protect both parties.
Buyer Protections
Putting down an earnest money deposit is a sure-fire way to show sellers that you’re a serious contender and give you leverage when negotiating favorable contract terms.
It’s common for the seller to pay some, or all, of the closing costs with VA loans. The best way to build this kind of relationship with your seller is to show your goodwill as a buyer by putting in a good faith deposit.
Seller Protections
When a buyer puts down an earnest money deposit, it reassures the seller that the buyer won’t back out of the contract without a valid cause. If buyers walk away from the sale for an invalid reason, they will lose the money they put in their earnest money deposit.
What are Valid Reasons to Back out of a Contract?
Your contract should state the acceptable reasons you, as a potential homebuyer, can cancel the contract. If you back out of the contract for a cause that isn’t listed, you could lose your earnest money deposit.
Some valid reasons a buyer could back out on the sale include:
1. Your home is appraised for a lower value than listed on the contract.
It’s unfair to have a buyer pay more for a house than they feel they should. If the appraiser decides your home is worth less than stated on the contract, the mandatory escape clause comes into play.
The Department of Veteran Affairs requires the mandatory escape clause and protects the buyer from being trapped in a VA mortgage where the appraised value of the home is lower than the sale price listed on the contract. If the buyer decides to walk away, the earnest money deposit will be returned to them.
2. Your home inspection fails.
If any significant issues pop up on your home inspection, like cracks in the foundation, the buyer can back out of the contract. In this case, the earnest money deposit would be returned to the buyer.
If the buyer decides to walk away from the sale for any reason not listed on the contract, the seller pockets the earnest money deposit.
Is an Earnest Money Deposit Refundable?
Let’s say the seller decides to walk away from the deal after an earnest money deposit has been placed. In this case, all money would be refunded to the buyer.
However, like said earlier, if you as a buyer walk away for reasons not listed on the contract, your money will not be refunded.
