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Earnest Money: More Than Just A Show Of Good Faith

The meaning of earnest money is in the name. It's a deposit of good faith on the pending loan from buyer to seller. This sort of investment sets you apart from other buyers by showing your serious intent to purchase a home. This money doesn't disappear either, and it serves to protect both buyer and seller financially.

How much should I put down?

Fortunately, earnest money isn't a huge financial burden, but many factors go into the deposit.

You'll be handing the escrow agent a check for an agreed upon amount after making an offer on a house. How much you fork up says a lot about your willingness to buy. An offer too low might put off the seller, but there's no need to throw your life savings at the seller either. Consider the following when asking how much to put down:

  • If you're making an offer without any competition, put down about 1% of the offering price on the home.
  • If you're making an offer and know other people are looking at the home, consider putting down roughly 2-3%.
  • A flat fee ranging from $500-2000 might be acceptable.
  • The state of the local and national housing market.
  • How quickly you can close the deal.
  • How eager is the seller?

What happens to the deposit?

Remember, you're not throwing this money down a bottomless pit--it's going to be put in an escrow account for later use. Around closing time you should discuss with your VA loan specialist if the money should be put towards closing costs or if you will be receiving a refund of all or a portion of the earnest money. The VA seriously limits what veteran borrowers pay in closing costs, so you might be getting a full refund. Either way, the money is there.

What if I back out of the loan?

You'll typically want a third party escrow agent such as the title company to hold your earnest money, and you'll never want to directly give the seller your money. If the transaction doesn't close and the seller cannot return the money, they may not be legally required to give you back your deposit. Giving the money to a third party escrow agent protects the buyer from questionable sellers.

Backing out of a home can be a sticky legal situation. When you signed your contract for the home there were certain contingencies associated with buying the home. Contingencies within most VA loan contracts include:

  • Contingent on a home inspection
  • Contingent on obtaining financing
  • Contingent on selling your current home

If your reasons for backing out of the loan fall within the agreed upon contingencies, you'll likely be entitled to a refund of earnest money. These contingencies are designed to keep you safe from the unexpected, and you can negotiate these conditions with the seller before signing the contract. Chances are getting cold feet won't be a contingency, so carefully read your contract and know legitimately acceptable reasons for backing out.

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