VA Loans and Earnest Money: What You Need to Know

A Review of Earnest Money Options for VA Loans

A common point of confusion for VA loan homebuyers is how earnest money fits into the buying process. When you’re researching VA loans and earnest money requirements, it can be hard to tell what’s required, what’s optional, and what best keeps the transaction moving forward.

Earnest money is a good-faith deposit that homebuyers pay to a seller to show they are serious about purchasing a property. While it’s common practice in many real estate transactions, it isn’t legally required for any type of mortgage.

But when it comes to a VA loan and earnest money, an earnest deposit can help strengthen your position, especially in a competitive market.

What Is Earnest Money in a VA Loan?

An earnest money deposit is a good-faith deposit that shows the seller serious intent and commitment to buy. The buyer typically submits it with the purchase offer, and a third-party escrow account holds the funds until the mortgage closes.

The Department of Veterans Affairs (VA) doesn't require earnest money when buying a home with a VA loan, but it can help make your offer stand out in competitive markets. If the sale closes, buyers can put their earnest money toward closing costs or have it credited back to them at closing. If the transaction falls through due to a contingency clause, the buyer is entitled to a refund.

Down Payments vs. Earnest Money on VA Loans

A down payment and earnest money serve different purposes in a home purchase with a VA loan. Earnest money is a deposit submitted with your offer to show serious intent to buy, whereas a down payment reduces the loan amount at closing.

A major benefit of VA loans is that eligible buyers can often purchase a home with a 0% down payment. If the transaction closes, earnest money is typically applied toward the purchase or used to help cover closing costs, depending on the purchase agreement.

Is Earnest Money Required for a VA Loan?

Per the VA’s guidelines, earnest money is not required for a VA loan. However, whether you include an earnest money deposit depends on the housing market, the seller’s expectations, and your budget. In competitive markets, sellers may require an earnest deposit as a sign of serious intent, even though it is not required to qualify for a mortgage through the VA loan program.

How Much Earnest Money Should You Offer on a VA Home Loan Purchase?

An earnest money deposit is typically between 1–3% of the purchase price, but whether it’s a buyer’s or seller’s market can affect the amount. In a buyer’s market, sellers may be more flexible, and a smaller deposit may be enough for them to accept the offer. In a seller’s market, buyers may feel pressure to offer a higher percentage to remain competitive, even when using a VA loan.

When deciding how much earnest money on a VA loan to offer, many buyers work closely with their real estate agent to balance competitiveness with financial comfort.

Factors That Affect Earnest Money Deposit Amount

Several factors can change the amount of earnest money, even when using a VA loan. While the VA doesn’t require earnest money, market conditions, pricing, and contract details can all affect what sellers expect to accept an offer and what buyers feel comfortable offering.

• Market conditions: In a seller’s market, it’s not unusual for buyers to offer higher earnest money deposits to strengthen their offers, while in a buyer’s market, you may be able to offer less.
• Purchase price: Pricier homes come with higher earnest money deposits, as they are calculated as a percentage of the purchase price.
• Property type: Sellers of high-demand properties may expect a stronger earnest money deposit.
• Competitiveness: In multiple offer situations, buyers may offer a higher earnest money percentage to strengthen the chances of having their offer accepted.
• Contract terms: The contingencies and deadlines in your purchase agreement, such as inspection or financing clauses, determine whether you can get your earnest money back, and buyers may have to offer a bigger deposit and shorter contingency period when competition for buying homes is tight.
• Seller preferences: Some sellers prioritize a larger earnest deposit as reassurance that the buyer intends to follow through.
• Local practices: Earnest money norms vary by location, which makes it important to follow what’s typical in your local market.

What Happens to Your Earnest Money in a VA Loan?

If the seller accepts your offer, a third-party escrow account holds the earnest money until the transaction closes. Even with a $0 down VA loan, buyers can still put their earnest money toward closing costs or receive it back as a credit. If a contingency in the contract, like an inspection issue or a VA appraisal that is below the purchase price, stops the sale, the buyer will receive a refund of the deposit. But if the buyer walks away without a protected contractual reason, the seller keeps the deposit.

Earnest Money for VA Loans Refund Scenarios

In certain circumstances, a VA buyer may be entitled to an earnest money refund. This generally happens when a contract-protected issue stops the sale. Common refund scenarios include failed inspections, financing contingencies, or a low home appraisal that prevents the loan from moving forward under the sale terms agreed to in the purchase agreement.

VA loans also include a mandatory safeguard known as the VA Escape Clause, which allows buyers to cancel the contract if the home appraises for less than the purchase price without forfeiting the earnest money. But if a buyer backs out of the contract without a protected reason, such as changing their mind, the seller may keep the deposit.

Pros and Cons of Putting Down Earnest Money on VA Loans

There are both benefits and risks to putting down earnest money on a VA loan. While it strengthens your offer and shows you’re a serious buyer, especially in competitive markets, the VA does not require earnest money, even if the seller expects it. Buyers should also weigh the possibility of forfeiting the deposit if they back out without a contract-protected reason.

The table below compares earnest money advantages and disadvantages to help VA buyers decide what makes sense for their situation.

Tips for Protecting Your VA Loan Earnest Money

While earnest money can help strengthen a VA loan offer, buyers can take steps to protect that deposit throughout the transaction. Clear documentation, assurance of proper handling of the funds, and strong contract terms can reduce the risk of losing the funds if the deal falls through.

• Verify the use a third-party escrow account: A third-party escrow account protects the funds and releases them per the purchase agreement. A neutral party can prevent disputes and misuse of the deposit.
• Get everything in writing: All terms related to earnest money, such as refund conditions, deadlines, and contingencies should be documented in the purchase agreement. Written terms provide transparency and protect you if questions come up later in the process.
• Make sure you have strong contingencies: Contingencies for inspections, financing, and appraisal value help protect your earnest money if the home doesn’t meet the loan's requirements. VA buyers should also make sure the VA Escape Clause is included to protect the deposit if the appraisal comes in low.
• Follow deadlines closely: Purchase contracts include timelines for inspections, financing, and other contingencies that affect earnest money protection. If you miss a deadline, you could risk losing your deposit.

Final Thoughts: Earnest Money on VA Loans

When it comes to a VA loan and earnest money, it’s not legally required, but it can affect your offer’s acceptance, especially in hot markets. Knowing how earnest money works, when it’s refundable, and how protections like contingencies apply can help buyers get the home they want while reducing the risk of losing the deposit.

Navigating a VA loan and earnest money considerations for the first time? Learn more about VA Loans from Freedom Mortgage. We’ve helped thousands of Americans save money with the hard-earned VA loan benefit and we can help you, too!