Earnest Money for VA Loans – Is It a Good Idea?

An earnest money deposit isn’t required if you are using a VA loan to buy a home, but it may be a good idea in certain situations. Read more to find out if an earnest money deposit makes sense for you.

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If your dream is to buy a home, you want to do everything possible to make sure it becomes yours. An earnest money deposit when you make an offer on a home tells the seller that you’re serious about buying it and can give you an edge in a competitive market.

Earnest money isn’t legally required if you are using a VA loan (or any other loan) to buy a home, but may be required in order to get the home you want. It is almost never a bad idea to put earnest money down on a home, as long as you are certain you want to buy the home and the deposit won’t cause you financial problems during the closing process.

Once you know how earnest money with a VA loan works, you’ll be equipped to make an informed decision about how putting the deposit down fits with your home-buying process.

Let’s take a look at earnest money with a VA loan, how much you should put down, what happens to the money once you do, the advantages and risks, and how it can help your home-buying experience.

What Is an Earnest Money Deposit?

Earnest money is also called a “good faith deposit,” since it shows the home-seller that you are making the offer in good faith: You really want to buy the house they are selling. The seller takes a chance when they accept an offer from a buyer. They must take the home off the market and can’t take any other offers. The deposit eases some of the risk, because if the buyer walks away, in most cases, the seller keeps the money.

Earnest money is not a down payment, but a deposit in an amount that is agreed to by the potential buyer and seller when an offer is made on a home. The money, in most cases, is put toward the down payment at closing.

“I think it’s essential to have earnest money when purchasing a house with a VA loan because it shows the seller that you are serious about the purchase,” John Pena, CEO of Pena El Paso Realty Group, said. “It helps to strengthen your offer and makes you stand out among other potential buyers. You can think of earnest money as a deposit that shows your commitment to buying the property. It also gives the seller some reassurance that you are financially capable of closing the deal.”

Earnest money is usually 1% to 3% of the purchase price. So, if the agreed-to sale price is $200,000, the earnest money deposit would be between $2,000 and $6,000. In the most competitive markets, the amount can be 5% to 10%. The buyer usually includes a suggested amount when making an offer on the home. Like the offer itself, the seller may negotiate for a different amount, and the two parties come to an agreement before the offer is accepted.

When the offer is made, the deposit goes into an escrow account, which is a third-party account that neither the buyer nor the seller has access to. Do not pay the earnest money directly to the buyer, because then the money becomes theirs and may be hard to get back.

VA Loans and Earnest Money

VA loans do not require earnest money. In fact, earnest money is not legally required for any type of mortgage loan anywhere in the country. You may see references to it being “customarily required” or even just “required,” but that only means that in the region being referred to, sellers and real estate agents expect buyers to put down earnest money as part of any real estate offer. If you don’t, you likely won’t get far with a purchase. You will mostly see that earnest money is “required” in very hot real estate markets like Florida.

The VA has requirements when it comes to VA loans and earnest money. The buyer must use their own money; it can’t be part of the VA loan, another loan or a gift. The VA will require documentation on where the money came from before the loan is approved.

Different states have laws about when earnest money must be provided following an offer, who will hold the money, and even what amount can be used. For instance, California caps it at 3%. That doesn’t mean you can’t offer more, but if the sale doesn’t go through, the seller can only keep 3%. Many states often have a minimum requirement, usually $500. Again, this doesn’t mean that it’s required that buyers put down earnest money, just that if they do, it must meet the minimum.

Check with a real estate agent on what your state law is, as well as what the local “requirements” are for earnest money when you are planning to make an offer on a home. The ins and outs of earnest money and navigating the housing market in general, particularly a competitive one, are much easier to understand if you enlist the help of a real estate agent. The VA has a video that offers advice on using a real estate agent when buying a home with a VA loan.

There are, and they can have an impact on whether you need earnest money. For instance, since a down payment may not be required with your loan, the earnest money will go toward closing costs. If closing costs are less than your deposit, then you get the balance back.

Should You Offer Earnest Money with a VA Loan?

There are many VA loan benefits that are great for qualifying buyers, including no down payment, no private mortgage insurance (PMI), more lenient financial requirements and lower interest rates. Sellers in a competitive market, however, don’t care about those benefits, so if you’re buying a home with a VA loan, you may want to sweeten the pot with earnest money.

Alex Locklear, founder and managing director of NC Cash Homebuyers, in North Carolina, said earnest money can help buyers with a VA loan entice a seller.

“VA loans are backed by the government and often have more flexible terms and lower interest rates, making them an attractive option for home buyers,” said Locklear, whose company operates in a region with one of the highest military populations in the United States. “This also means that there is a higher risk for the seller, as they may receive less money upfront compared to a traditional loan. So, having earnest money in this scenario assures the seller that you are invested in the purchase and reduces the risk of them backing out.”

Pena, the El Paso broker, is also in a major military region. He said that in his experience, it’s not a hard-and-fast rule to have earnest money when using a VA loan, but it can “make the offer more attractive to the seller and increase your chances of getting the house you want.”

Pena added, “While it may not be a strict requirement, having earnest money can greatly benefit you as a buyer.”

The bottom line is that the competitiveness of the housing market and the seller’s preference will determine if you should offer earnest money.

How Much Earnest Money Should I Put Down?

An earnest money deposit is an agreement between the buyer and seller. While some states have minimum and maximum limits, the amount is ultimately up to the parties involved. Again, this is an area where having a buyer’s agent with knowledge of local market trends can be a big help.

The typical earnest money deposit is 1% to 3%, though it is much higher in markets where inventory is low and houses sell fast. You may find 5%, or even 10%, particularly on new construction, will be what it takes to get a seller’s attention.

Questions to ask yourself (or your buyer’s agent) before deciding whether to offer earnest money and how much to offer, are:

Is it a buyer’s or seller’s market? One way to gauge this is to check your state’s real estate association website, which posts monthly statistics on how long homes stay on the market and what the average percentage of the list price is being paid. If homes are on the market for less than an average 30 to 45 days and/or are selling for 100% or more of the list price, it means it’s a hot market.

What are the local trends? Different areas of the country have different expectations when it comes to earnest money, aside from how hot the market may be.

What type of house are you buying? Earnest money expectations for new construction are often higher than that for a fixer-upper; houses in highly desired neighborhoods will likely require more earnest money, etc.

What can you afford? Once you part with the earnest money, you won’t have access to it. Make sure you can afford to make the deposit,. Otherwise, you might have trouble paying your bills or your finances might not hold up during the vetting period before closing.

What are your state’s rules regarding earnest money? Most states have laws about things like how quickly after an offer the earnest money must be provided, or the minimum amount allowed. Be sure you understand the rules and can adhere to them before making an offer.

Is Earnest Money Refundable with a VA Loan?

Earnest money is applied to your down payment or, if you don’t have one, your closing costs. If you don’t have a down payment with your VA loan, and the earnest money deposit is more than your closing costs, you’ll get the balance refunded.

If you don’t go through with the sale, the seller, in most cases, keeps the earnest money deposit.

Earnest Money Contingencies

The one exception is that if contract contingencies kick in that nullify the sale. A contingency is a particular point that governs the contract. In other words, something must happen a certain way for the contract to be valid.

The VA has specific contingencies that allow earnest money to be returned when a VA loan is approved. Other contingencies are standard in most purchase and sale agreements. Even if you are getting a VA loan, make sure the required contingencies are in the contract. It’s something you can discuss with your buyer’s agent, or you might have a lawyer look over the contract if you are acting on your own. It is particularly important to make sure the contingencies are in place if you are buying directly from a property owner who is not using a real estate agent.

You are free to include your own contingencies in a contract, but the seller must agree to them before it is finalized.

If met, these contingencies mean earnest money can be returned. The only loophole is that some of the contingencies have deadlines that the buyer needs to keep a close eye on to keep them valid.

Some of the contingencies that allow VA loan earnest money refunds:

Appraisal Contingency

The VA Amendatory Clause, also known as the VA Escape Clause, must be written into any home purchase and sale contract that’s being financed with a VA loan. If the home appraises for an amount lower than the contract price, the buyer can back out and get their earnest money back.

VA Minimum Purchase Requirements (MPRs)

The VA requires minimum purchase requirements (MPRs), that ensure a home is safe, structurally sound and sanitary. If the property doesn’t meet the MPRs, the VA loan won’t be approved. Include an MPR contingency in the contract in order to have an extra layer of protection beyond the standard inspection contingency. This will allow you to recoup your earnest money if the purchase is canceled because VA MPRs aren’t met.

Home Inspection Contingency

A home inspection contingency in your purchase-and-sale agreement requires the property to meet certain standards. If it doesn’t, the seller can either fix the problems or you can cancel the purchase and get your earnest money back. Keep in mind that VA MPRs may go beyond a standard home inspection, so be sure both are in the contract when getting a VA loan.

Selling Contingency

If you have to sell your current home before you can buy the new one – something many military families are all too familiar with – this contingency can be written into the contract as well. That means if your home doesn’t sell by a certain deadline, the purchase is off and you get your earnest money back.

Financial Contingency

A financial contingency, or mortgage contingency, allows the buyer to walk away if they don’t get a mortgage within a certain amount of time. Most VA mortgages take 30 to 45 days to finalize. The contract will include a reasonable deadline. If you don’t get your mortgage in time, you can walk away with your earnest money.

Advantages of Offering Earnest Money with a VA Loan

As we’ve discussed, there are a lot of good reasons to offer earnest money with a VA loan.

Some of the pros of offering earnest money with a VA loan:

  • Standing out in a competitive market
  • Showing the seller you are serious about buying
  • Putting some early money toward a down payment or closing costs

Risks of Offering Earnest Money with a VA Loan

There are definite risks to putting an earnest money deposit down on a home, particularly if you’re on a tight budget. Be sure that, no matter your financial situation, you pay close attention to your purchase-and-sale agreement and meet all the requirements so that you don’t inadvertently violate the contract and nullify it.

Some of the cons of offering earnest money with a VA loan:

  • Having less money on hand during the closing period of the purchase
  • Losing the deposit if the purchase falls through for reasons that aren’t covered by a contingency
  • Losing money if you decide you don’t want the house

Additional VA Loan Information

Military Money offers VA loan information on a variety of topics, including:

About The Author

Maureen Milliken

Maureen Milliken has been writing about finance, banking, investment, entrepreneurship, real estate and other related topics for more than 30 years. She started as the “Business Beat” columnist for the now-defunct Haverhill (Mass.) Gazette and currently is one of the hosts of the Mainebiz business-focused podcast, “The Day that Changed Everything” in addition to her daily writing. She also is is the author of three mystery novels and two nonfiction books.


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