What are Earnest Money Deposits?

What is Earnest Money?

An earnest money deposit is used to show a buyer’s commitment to purchasing a home. When buyers back up an offer with cash, they’re showing sellers that they have skin in the game. Often referred to as a “deposit of good faith,” earnest money proves your willingness—and capability—to buy a home.

In California, there are no laws that say earnest money must be included with a real estate transaction. Instead, earnest money deposits are used as a way to make offers more attractive, especially in competitive markets. When it comes to VA home loans, the earnest money is typically kept slim — this is one of the reasons why sellers might prefer other types of loans. This is also precisely why The Dreamweaver Home Purchase Process uses large earnest money deposits to help buyers make better offers.

How Does Earnest Money Work?

The earnest money process is simple. The buyer provides an earnest money check when the purchase contract is signed, which the seller will keep if the buyer backs out. If the deal goes through without a hitch, the buyer can put this earnest deposit toward closing costs. Earnest money deposits are usually handled by an independent third party, such as an escrow officer or attorney.

The buyer doesn’t automatically lose the earnest money if the deal doesn’t go through. There are many situations where the earnest money deposit will be refunded back to the buyer, such as when a home appraises for less than the sales price. In this event, a Veteran has the option of canceling the offer without forfeiting the deposit.

Another situation where the earnest money deposit can be refunded has to do with home inspections. During the home buying process, there is an inspection period—usually of ten days—during which the buyer can hire a home inspector to come and verify the condition of the property. If the inspector finds any deal-breakers, such as issues with the foundation, the buyer has the right to back out of the deal without losing their earnest money deposit.

Earnest Money Deposits vs. Down Payments

It’s important to understand that earnest money deposits and down payments are different things. First off, the earnest money goes to the seller while down payments are made to the lender. Though most VA home loans do not require down payments, earnest money deposits are common. Typically, these deposits are 1-2% of the purchase price. This amount varies from deal to deal, and your VA-savvy real estate agent can advise you on how to make your offers attractive with earnest money.

At SoCal VA Homes, we are proud only to serve those that serve our country. If you’re looking for a home in Southern California, our team of Veterans serving Veterans is at-the-ready to provide you a better buying experience. From earnest money to closing costs, we’ll guide you through the entire process of utilizing your VA home loan to purchase your ideal home.