First-Time Homebuyer
Home Ownership
VA Loan

Earnest Money & VA Loans

The real estate market has been hot for the past few years, and even now, with interest rates rising, scoring a home isn’t easy. The best way to show sellers that you are serious about purchasing their home is with earnest money. Earnest money is like a security deposit letting the sellers know you are committed and have the funds to go through with the transaction.

While VA financing approval doesn’t require earnest money, it could help tip the scales in your favor when purchasing a home in a competitive market. Let’s take a look at what earnest money is and how it affects VA loans. 

Why Is Earnest Money A Good Idea?

Earnest money deposits vary but typically range between 1% – 3% of the home's purchase price. The money is put in an escrow account until the deal is complete, and if all goes well, the buyer applies the amount as a down payment. 

Earnest money is an attractive option for sellers, as it protects them if a deal goes south.

For example, a home is removed from the market during the buying process. If the buyer backs out at the last minute (barring any contingencies), the earnest money deposit is given to the seller to protect them from the loss.

Earnest money can also return to the buyer if the home fails an inspection or other contingencies in the sale agreement.  

VA Loans & Earnest Money

Contrary to popular belief, earnest money is not required for a VA loan to purchase a home. However, some sellers do require earnest money deposits on all offers, which is their prerogative. 

If you end up submitting earnest money as part of your offer, just know that this money can be sourced from gift funds or a loan.

Should You Offer Earnest Money With A VA Loan?

Although earnest money isn’t a VA lender requirement, it can give you a leg up in this seller’s market. 

Here are some of the benefits:

  • In a multi-offer situation, an offer with an earnest money deposit may stand out from the rest
  • Earnest money deposits are applied directly to your down payment or closing costs, thereby reducing the amount of money you need later 
  • Earnest money can be refunded if a seller or home fails a contingency
  • A good faith deposit will help you strengthen your relationship with the sellers from the start

The main issue with offering earnest money with a VA home loan is that you could lose your money if you violate the purchase contract. For example, failing to complete a transaction within a specific time frame could cause you to forfeit your earnest money. Thankfully, retaining your earnest money is easy if you follow the contract. 

How Much Earnest Money Should You Offer With A VA Loan?

The amount of earnest money a buyer should offer varies; however, a good rule of thumb is 1% – 3% down. 

Your real estate agent can help you determine the amount of earnest money for your situation. This way, you have the best chance of getting your offer accepted.  

Luckily, offering earnest money is a pretty safe bet for buyers. Losing earnest money is not common and is entirely avoidable. 

The purchase agreement outlines what happens to the earnest money if the contract falls through and lists all contingencies that allow the buyer to leave the deal unscathed. Hiring a VA knowledgable real estate agent can help you ensure that you don’t lose your earnest money deposit should the deal go south.

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The critical takeaway here is that if you plan to finance your home with a VA loan, you’re not required to offer an earnest money deposit. However, it’s usually a smart idea with little risk. 

Learn how to apply for a VA loan online with Military Homespot Lending. Click here for the details.