VA Guidelines for an Earnest Money Deposit

As a home buyer, it's crucial to understand the VA requirements for an earnest money deposit when using the VA loan program for veterans. An earnest deposit is a sum of money the buyer pays the Seller as part of a home sale agreement, demonstrating good faith and commitment to purchasing the property. The earnest money deposit may be refundable if the home purchase falls through.

Working with a trustworthy real estate broker is essential to ensure you know how to handle the earnest deposit and keep the money safe. Whether you're a first-time home buyer or a seasoned veteran, understanding the requirements and implications of an earnest money deposit will make the home purchasing process smoother and more enjoyable.

Earnest Money Deposit: What is it?

When you buy a home, the purchase offer will require you to put down an "earnest money deposit." This good faith deposit shows the Seller that you are serious about buying their home. The amount of earnest money varies but is typically 1-3% of the purchase price in most real estate markets. If you believe in a $200,000 home, your earnest money deposit would be $2,000-$6,000.

Until closing, the earnest money deposit is kept in escrow, which is applied toward your down payment. Suppose, for some reason, the deal falls through (e.g., you can't get financing).

In that case, your earnest money deposit will usually be refunded.
One of the numerous property purchasing procedures is making an earnest money deposit. But it's an important one! Earnest money deposits show the Seller that you're committed to buying their home, and they will take your offer more seriously.

What is Earnest Money Used for?

The deposit, commonly called the earnest money deposit, is crucial in a real estate transaction. It serves as a commitment from the buyer to the Seller, indicating their serious intent to purchase the property. The Seller considers it insurance, as it protects them from any unknown reasons that could lead to a breach of the agreement.

The title company or real estate business typically holds the deposit in escrow until the completion of the agreement. If all goes smoothly and the buyer continues the purchase, the deposit will go toward the purchase price. A refund is possible in case of an unknown or uncontrollable circumstance, such as a title issue.

Understanding earnest money is crucial when home lending, as it shows the level of dedication towards making the purchase. If, for any reason, the buyer decides to back out without a contractual reason; they will forfeit the deposit. However, earning a refund for actual contractual breaches is possible.

In summary, earnest money ensures the completion of the purchase, acts as proof of intent, and provides a level of protection for Sellers. Therefore, buyers should consider earnest money when agreeing.

Is Earnest Money Refundable?

What happens if you change your mind or can't get financing? Is earnest money refundable?

The earnest money is usually refundable if the deal falls through. However, there are some situations where the Seller may keep your earnest money deposit. For example, the Seller could keep your earnest money deposit if you fail to meet the contingencies in your contract or back out of the deal for no reason.

It's essential to read your contract thoroughly to understand your specific situation. If you have any questions, ask your real estate agent or lawyer.

How Much is Earnest Money?

Typically, earnest money deposits range from 1% to 3% of the home's purchase price. If you're buying a $300,000 home, your earnest money deposit could be as low as $3,000 or as high as $9,000.
The earnest money you'll pay when buying a home varies greatly depending on the home purchase price and your circumstances. Generally, the higher the purchase price, the higher the earnest money deposit.

While the size of your earnest money deposit will be based mainly on the home's purchase price, other factors can influence how much you'll pay. For example, sellers may require a higher deposit in a competitive housing market to ensure your offer is serious.
If you have a firm offer on a home, you can get away with a lower deposit. Nevertheless, if your request could be more assertive or there are multiple offers, you will need to increase your earnest money deposit.

If you need help determining how much earnest money to offer on a home, speak with your real estate agent or loan officer. They can help you choose an appropriate amount based on your unique situation.

Does Earnest Money Go Towards the Down Payment?

Most of the time, sure. The earnest money might go toward the down payment or the closing fees.

The percentage of the purchase price the buyer pays up front and a mortgage loan covers the remainder is known as the down payment. The earnest money, however, may only sometimes count toward the down payment.

When Can the Seller Keep My Earnest Money?

Most sales contracts for real estate purchases include provisions that safeguard the buyer with certain contingencies. If you cancel the contract due to a mutually agreed-upon contingency, your earnest money will be refunded to you.
If any of the conditions listed below are met, you will get your earnest money back:

The house fails the home inspection, and the appraised value exceeds its sale price.
There are problems with the title search of the residence.
You are unable to secure a mortgage.

Your earnest money could be lost if any of the following apply:

1) You must satisfy the timeframes specified in the contract for the various inspections and appraisals.
2) You decided to withdraw from the sale without a valid reason.

When is Earnest Money Due?

When purchasing a home, as a buyer, you may question the timing of providing your typical earnest money deposit. The earnest money is typically paid using a personal check, certified or cashier's check, or wire transfer directly to the Seller if the offer is accepted. The buyer's real estate agent or title firm typically holds the earnest money deposit in an escrow account until closing.

Usually, your typical earnest money deposit should be submitted when you offer to the Seller unless you have negotiated otherwise. If the transaction fails to come together, buyers generally receive their earnest money back, including if they cannot get financing. However, you may lose the property if you fail to submit the earnest money deposit on time or if the check bounces. Generally, the earnest money deposit is often held in an escrow account by the title firm or real estate agent until closing. The money is then paid directly to the Seller.

Is Earnest Money Required?

The answer is maybe. Sometimes, sellers may request a good faith deposit as part of the sales agreement. In other cases, buyers may deposit to show their good faith and commitment to the deal. Ultimately, whether or not an earnest money deposit is required will come down to the individual Seller and buyer.

Where Does Earnest Money Go?

There may be a 'contingency time' for the appraisal, bank approval, property inspection, or HOA deed approval.

The earnest money held by the escrow or title company is typically applied to the house buyer's down payment or closing fees. This occurs in the majority of transactions.

The earnest money deposit can be cashed when the escrow is established. Because of this, you need to ensure that your funds come from the appropriate sources.
The Steps Involved:
1) The earnest money and the accepted purchase contract are delivered to an escrow (or title) company.
2) At settlement, the earnest money deposit is applied as a credit toward the buyer's down payment and the Seller's closing costs.
3) The earnest money will be refunded to the buyer if no closing costs or down payment are required. This often happens when purchasers pay cash.

If the buyer withdraws, what happens to the earnest money?

If the buyer cancels the purchase, the earnest money deposit is lost. Because the earnest money deposit confirms the buyer's intent to acquire the property, this is the case. However, there may be instances in which the buyer is entitled to a refund of the earnest money.

For example, if the Seller cancels the sale or concerns with the property were not revealed in advance.
The deposit is refundable only under specified conditions.

What Causes You to Lose Earnest Money?

1) The buyer must satisfy the contract's deadline. If the buyer can't make the deadline, for example, they may lose the earnest money if they break the contract and don't purchase the property.
2) The buyer backs out. After signing a purchase agreement, a prospective buyer sometimes chooses not to buy the home. When this occurs, the buyer needs to point to a contingency in the purchase contract for not going through with the purchase; otherwise, the buyer will forfeit the earnest money deposit

Will I Lose My Deposit if I Am Denied a Mortgage?

If you want to protect your earnest money, ensure that there is a contingency clause in your agreement. This will keep the earnest money amount in an escrow account. If your application is declined, you can get their earnest money back, as the money is refundable. However, your deposit will be forfeited if you decide not to proceed with the mortgage. To avoid this, entrust your earnest money directly to a real estate brokerage. The money will be held safely until the deal is closed.

Can Earnest Money Be a Personal Check?

The answer is maybe. While most sellers would want a certified or cashier's check for the earnest money deposit, others may be prepared to take a personal check. Before writing the check, there are several things to consider.
First, you must verify that the check is dated the day of or before the deposit is due. This will guarantee that the check clears promptly. Second, your bank account must have sufficient funds to pay the check. Remember that the earnest money deposit usually is 1-2% of the buying price, so you'll need cash.

Always inquire whether the vendor accepts personal checks. And if they accept a personal check, follow the following steps to guarantee the check clears and the deposit is completed.

Conclusion

An earnest money deposit is crucial when it comes to home purchases. The purpose of an earnest money deposit is to hold the buyer accountable and to show the Seller that the buyer is serious about purchasing the home. The Seller may hesitate to take the home off the market without an earnest money deposit. The earnest money is usually deposited into an escrow account until the home is officially sold.

Some people may attempt to give earnest money directly to the Seller, but this is not recommended. Instead, it's best to go through a trusted real estate agent or attorney to ensure the earnest money is handled correctly. If the deal falls through due to the buyer not following through with the purchase, the earnest money is forfeited. If the Seller backs out of the deal, the earnest money is returned to the buyer. Deporting earnest money is essential to purchasing a home and should not be taken lightly.

SOURCE:
Borrower Fees and Charges and the VA Funding Fee
https://www.landmarkhw.com/resources/buying-selling-house/what-is-an-earnest-money-deposit/7/137
https://www.unison.com/blog/how-does-earnest-money-deposit-work/