Dec. 5, 2012
Q: My husband and I qualified for a VA loan, which means that we can purchase a home with no down payment, but we are still being asked for $2,000 “earnest money” – what is this? Why do we have to come up with so much?
A: Congratulations to you and your husband on making an offer on your new home! (If you have been asked for earnest money, that means you are making an offer on property.) Your earnest money means that you “earnestly” intent to purchase the property. It is a sort of security deposit that accompanies your offer showing good faith.
There is no set amount for how much earnest money can be asked or how much you should put down. Typically, earnest money is 2-3% of the purchase amount, but the more you put down, the more serious your offer looks. Right now, the market is pretty tight, so you may want to really seriously consider the effect your earnest money has on the seller. Most of the time, you can offer less than what they are asking – but in this market, I wouldn’t advise it.
The money is held in a trust account through the closing period and is usually applied toward the buyer’s down payment and closing costs. There are, of course, many exceptions to this rule. With a VA loan, since you will not be making a down payment, you may receive the money back or it may be applied towards closing. Sometimes, you may apply it towards your first mortgage payment.
What if the deal doesn’t go through?
While the money is in the trust, it is essentially held by both the buyer and the seller. Even if the deal does not close through any fault of the buyer, they may not be entitled to the whole amount back, due to cancellation fees. This is something that the buyer and seller must work out.
An experienced real estate agent will have dealt with these scenarios and will be able to walk you through the process. Make sure you ask your agent lots of questions along the way.