Earnest Money And VA Loans: What You Need To Know

Earnest Money And VA Loans:

In a fiercely competitive real estate market, adding earnest money to your offer can significantly enhance your chances against other buyers. Essentially serving as a deposit, earnest money demonstrates to sellers your commitment to buying their property. Although not mandatory for securing VA loan approval, earnest money can make your proposal more attractive, potentially helping you acquire your ideal home.

However, it’s crucial to adhere to the terms of the contract to avoid losing your earnest money deposit. Below is an essential guide to understanding earnest money in the context of VA loans.

What is Earnest Money?

Often referred to as a good faith deposit, earnest money is a sign to sellers that you are earnest about proceeding with the home purchase. Following the acceptance of an offer, a purchase agreement is established, and the home is taken off the market during the closing phase. If the deal falls through, the seller faces the inconvenience and expense of relisting the property. Therefore, earnest money serves as a safeguard for the seller against such setbacks.

Earnest money deposits typically range from 1% to 3% of the property’s buying price, though the exact amount can vary based on the current state of the real estate market. This deposit is held in an escrow account until the transaction is finalized. Should everything proceed smoothly, the earnest money can be applied towards the down payment or closing costs.

Conversely, if the property fails inspection or doesn’t meet other specified contingencies in the purchase agreement, the earnest money deposit may be returned to the buyer.

Do VA Loans Necessitate Earnest Money?

While purchasing a home with a VA loan does not inherently require an earnest money deposit, sellers might seek one under certain market conditions. Providing earnest money can act as a signal to the seller of your genuine interest and readiness to proceed with the home purchase. Hence, even when financing with a VA loan, it’s not unusual for sellers to request such a deposit.

Should you choose to put forward earnest money, the VA stipulates that these funds must originate directly from you, prohibiting gifts or loans for this purpose. Like your down payment, the VA will scrutinize the source of your earnest money deposit.

It’s important to note that specific mortgage types and state laws may mandate earnest money. For instance, in places like Florida, an earnest money deposit is almost always expected when buying real estate.

Should You Offer Earnest Money With A VA Loan?

Offering earnest money isn’t a requirement from VA lenders, but it can provide a competitive advantage in a seller’s market, where demand outstrips supply, and buyers vie for a limited number of available properties. In such markets, a bid accompanied by an earnest money deposit and appealing terms may distinguish your offer from others. Additionally, this sum can be allocated towards your down payment or closing costs, potentially lessening your future financial burden.

Pros And Cons Of Offering Earnest Money With A VA Loan

When contemplating whether to offer earnest money with a VA loan, consider both your personal situation and the prevailing market atmosphere. Weighing the benefits and drawbacks can aid in making a well-informed choice.

Pros:

• Demonstrating your commitment through an earnest money deposit can give you leverage over competing offers and possibly secure more favorable terms in your purchase agreement.
• Given that sellers often cover up to 4% of the purchase price in closing costs with VA loans, a good faith deposit may strengthen your rapport with them, making them more inclined to bear your closing costs, recognizing your serious intent.

Cons:

• The primary risk lies in potentially forfeiting your earnest money if you fail to adhere to the contract terms, such as not completing the purchase within the designated timeline.
• Deciding against buying the property after committing to an earnest money deposit means you’ll likely lose that deposit. Therefore, it’s crucial to thoroughly understand the contract timelines and ensure the property is truly what you desire to avoid forfeiting your earnest money.

Determining the Right Amount of Earnest Money for a VA Loan

The suitable amount of earnest money to offer when using a VA loan varies by the real estate market conditions where you’re looking to buy. Typically, buyers opt for an earnest money deposit between 1% and 3% of the home’s purchase price. However, in highly competitive markets, it might be necessary to increase this to as much as 10%.

On the flip side, in a market favoring buyers, where there’s a surplus of available properties, a smaller earnest money deposit may suffice. If you find yourself in a situation where cash offers and intense bidding wars are common, raising your earnest money deposit could be advantageous to stand out.

Consulting with a real estate agent can provide valuable insight into how much earnest money is appropriate for your specific circumstances, ensuring your offer is neither excessive nor insufficient, thereby enhancing the likelihood of it being accepted.

Is Earnest Money Refundable with a VA Loan?

The fate of earnest money in the event a contract is terminated is typically dictated by the terms outlined in the purchase agreement. Most agreements include specific contingencies that, if met, permit the buyer to withdraw from the deal without forfeiting their earnest money.

For instance, should the agreement allow for withdrawal based on the results of a home inspection that doesn’t meet the buyer’s criteria, the buyer can opt out and reclaim their earnest money. However, if the buyer simply changes their mind and decides against purchasing the property, the earnest money is usually forfeited to the seller.

Below are several common contingencies designed to safeguard your earnest money:

• Home Inspection Contingency: This allows the buyer to exit the deal if a home inspection reveals significant issues. Alternatively, it opens the door for negotiation on repairs or the sale price instead of abandoning the purchase.
• Appraisal Contingency: Specifically beneficial for VA loans, this contingency protects the buyer’s earnest money if the home’s appraisal value is lower than expected. Every VA loan includes this appraisal protection.
• Financing Contingency: If you’re unable to secure approval for your VA loan by a certain deadline, this contingency ensures the return of your earnest money.
• Selling Existing Home Contingency: This applies when you need to sell your current home before completing the purchase of the new one. This contingency is less appealing to sellers in a competitive market.

In fast-moving markets, there might be pressure to waive these contingencies to make your offer more attractive. For instance, if you’re confident in your VA loan qualification, you might consider waiving the financing contingency. However, be cautious about waiving appraisal or inspection contingencies, as they offer protection against unforeseen property issues, like structural problems. While tempting, skipping these protections to enhance your offer could have negative consequences.

The Bottom Line

Offering earnest money with a VA loan isn’t mandatory, but in a competitive housing market, it can provide a significant advantage. If you’re uncertain about including an earnest money deposit with your offer, seeking advice from your real estate agent is wise.

Considering taking the next step in the home loan process? Consider getting pre-approved with Elevation Mortgage today.