Earnest money, often known as a “good faith deposit,” is a sum of money paid upfront to show the seller that you are serious about purchasing a home. In most cases, earnest money amounts to around 1% of the total purchase price.

If you’re looking to buy a property in a hot market where several serious buyers are bidding on the same house, you’ll want to put more money down to indicate that you’re serious about the acquisition.

Is Earnest Money Required for a VA Loan?

No, a down payment or earnest money deposit is not required for VA loans. However, the seller may require this in order to view you as a serious buyer. As part of the VA loan procedure, it’s not unusual for sellers to ask for an earnest money deposit.

Benefits of Earnest Money

Earnest money deposits indicate sellers that you are serious about buying the house, and they also secure both parties.

Buyer Protections

Putting down an earnest money deposit is a sure-fire approach to demonstrate to sellers that you’re a serious buyer and gives you bargaining power when it comes to contract stipulations.

With VA loans, it’s usual for the seller to cover some or all of the closing costs. The easiest method to establish this type of relationship with a seller is to demonstrate your good faith as a buyer by placing a good faith deposit.

Seller Protections

When a buyer makes an earnest money deposit, the seller is assured that the buyer will not back out of the deal without good reason. If buyers back out of a deal for an illegitimate cause, they will forfeit their earnest money deposit.

What are Valid Reasons to Terminate a Contract?

The reasons you, as a potential homebuyer, can cancel the contract should be included in the contract. You risk losing your earnest money deposit if you back out of the contract for a reason that isn’t specified.

The following are some valid reasons why a buyer might back out of a deal:

1. The appraised value of your home is less than the amount stated in the contract.

It’s unjust to make a buyer pay more than they should for a home. The necessary escape clause kicks in if the appraiser determines your home is worth less than specified in the contract. Unless an addendum waives this clause.

The Department of Veteran Affairs, on the other hand, requires the mandatory escape clause for a VA loan, which prevents the buyer from being locked in a VA mortgage if the home’s appraised value is less than the sale price specified on the contract. The earnest money deposit will be reimbursed to the buyer if he or she decides to back out.

2. The home inspection fails.

The buyer can back out of the contract if there are any major flaws discovered during the home inspection, such as foundation cracks. The earnest money deposit would be reimbursed to the buyer in this situation.

The seller keeps the earnest money deposit if the buyer decides to back out of the deal for any reason not specified in the contract.

Is an Earnest Money Deposit Refundable?

If something goes wrong during the appraisal that was predetermined in the contract, the earnest money is returned. This could be due to a lower appraisal price than the sale price, or if the house has a severe fault. Importantly, earnest money may not be refunded if the fault was not anticipated in the contract and the buyer decides not to purchase the residence within the agreed-upon time frame.

What is Property Tax Exemption?

Several states provide special exemptions for disabled veterans. If the entire assessed value of the property does not exceed $10,000, a disabled veteran in Arizona may be eligible for a $3,000 property tax exemption on his or her primary residence.

Earnest Money Deposits and VA Loans - Chris Kjorstad - Bushnell Rea...