Is an Earnest Money Deposit needed with VA Financing? This is a question that comes up quite a bit with Veterans using VA financing to purchase a home in Orange County, CA. Since no down payment is needed for a home purchase up to a price of $625,500, some would wonder why a deposit is even needed. Especially in a situation where the loan will be a VA No No. With a VA No No, not only is there no down payment, but the closing costs and prepaid expenses are also paid, either by the seller, the real estate agent, or the lender through a lender credit. The answer is “Yes”, an Earnest Money Deposit is necessary. To understand why it is important to understand the true purpose of the Earnest Money Deposit, or EMD for short.
Purpose of the Earnest Money Deposit
By providing an Earnest Money Deposit as part of the initial offer you are showing the seller how serious you are. The EMD is held in an escrow account, not by the seller or real estate agent. Imagine if you owned a home and had three offers to purchase your home for $500,000. The first offer comes in with a $15,000, or 3% of the purchase price. The second offer comes in with an EMD of $7,500. The third offer comes in with a $1,000 EMD. As the seller you would most likely feel that the two offers with an EMD of $15,000 and $7,500 are more serious, and may have a better chance of closing than the offer with only a $1,000 EMD. Unfortunately, the offer with a $1,000 EMD may not even receive a counter offer. In order to let the seller know you are serious, the buyer will need to include an Earnest Money Deposit. The amount needed will vary from transaction to transaction. The real estate agent will most likely be able to give advice on the amount needed.
The Earnest Money Deposit is money that is held in escrow and will go towards the funds needed by the buyer to close escrow. Even with a VA loan with no down payment, there may be some funds needed to close. Let’s assume an Orange County Veteran is purchasing a VA approved condo in Mission Viejo for $600,000 with no down payment. Their EMD is $10,000. All closing costs and most of the prepaid expenses are covered by a lender credit, leaving just $2,000 needed from the Veteran to close escrow. Since they already have $10,000 deposited to the escrow company, they will received a REFUND of $8,000 when they close escrow on their new home.
Is the Earnest Money Deposit at Risk of Being Forfeited?
There is always a risk of the EMD being forfeited, especially of the contract is poorly written. By using an experienced real estate agent who is familiar with working with Veterans using VA financing, contingencies can be written into the contract that will protect the Veteran deposit from being forfeited. A contingency for inspections, loan approval, and the appraisal will all help to protect the EMD. The VA Addendum, which is included with the sales contract, will help to protect the Veterans deposit in the event that the VA appraisal comes in low.
Knowing and understanding how the EMD works is important for any home buyer. For Veterans, it just add’s to the importance in working with experienced real estate professionals who are very familiar with the Jumbo VA loan program in Orange County, where home prices and VA loan limits are higher than most parts of the country.
Authored by Tim Storm, an Orange County VA Loan Officer specializing in VA Loan. MLO 223456. – Please contact my office at the Home Point Financial. My direct line is 949-640-3102. www.OrangeCountyVALoans.com. I will prepare custom VA loan scenarios which will be matched up to your financial goals, both long and short term. I also prepare a Video Explanation of the your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.