Earnest Money And VA Loans: What You Need To Know

Including earnest money with your offer can give you a leg up on other buyers in a competitive real estate market. Earnest money essentially acts as a security deposit. It lets sellers know you’re serious about purchasing their home. While earnest money isn’t required for VA loan approval, it can make your offer stand out and get you closer to buying the home of your dreams.

But read the fine print in your purchase agreement. If you’re not careful, you may forfeit your earnest money deposit. Understanding how earnest money works with Department of Veterans Affairs (VA) loans can protect your investment and improve your odds of submitting a winning offer.

What Is Earnest Money?

Sometimes referred to as a good faith deposit, earnest money shows a seller you're serious about purchasing their home. In a seller's market – where buyers typically have less bargaining power – a large, upfront earnest money deposit can strengthen their offer.

Once a seller accepts an offer, they enter into purchase agreement negotiations with the buyer and usually take the home off the market. Taking the home off the market can be risky for sellers. If the agreement falls apart, they’ll likely have to relist the property, costing them time and money. Earnest money can protect a seller from potential losses if the buyer decides not to move forward with the sale for a reason that isn’t outlined in the purchase agreement.

The average earnest money deposit ranges from 1% – 3% of a home's purchase price. The amount a home buyer puts down will depend on market conditions.

The deposit will sit in an escrow account until the deal is complete. If the deal goes as planned, the earnest money deposit is applied to the buyer’s down payment or closing costs.

If the home doesn't pass inspection or satisfy other contingencies in the purchase agreement, the buyer can walk away from the deal and keep their earnest money deposit.