Today’s real estate market is competitive. It’s not unheard of to get into a bidding war with several potential buyers. How do you stand apart from the rest? Aside from giving the highest bid, you could also offer earnest money deposits.
Also known as ‘good faith money,’ it is a way to show a seller your seriousness in buying the home. Usually, you have a 3rd party hold onto the money, such as the title company. If you decide to jump ship and not buy the home after signing the sales contract, the seller gets to keep your deposit. The only exception to the rule is any conditions you put into the contract for the earnest deposit.
The VA Requirements
Generally, there are not a lot of requirements regarding earnest money. It’s up to the individual buyer and seller in most cases. In other words, there isn’t a minimum amount you must put down. However, the VA does require that the funds belong to you. In other words, they cannot be a loan or gift. The VA lender will need to verify the source of the funds, just as they would if you were to put money down on the home.
Canceling the Earnest Money Contract
What happens if a buyer cancels the earnest money contract? Your contract should state the acceptable reasons you can cancel the contract. If it’s not for one of the following reasons, you could forfeit your money:
- Lower appraised value – If the appraiser decides the home is not worth the amount you bid on the home, you can back out of the contract penalty free. The only acceptable way to rectify this situation is for the seller to lower the sales price. While it is an option for you to make up the difference in cash, it’s not recommended that you pay more for a home than it’s worth.
- Inspection report shows problems – If the inspector comes back and tells you there are major issues with the home, such as a crack in the foundation, you can back out of the contract. The inspection helps you make your final decision when purchasing a home as it points out things that are wrong with the home that you may not have seen.
If you cancel the contract for any other reason, chances are you will give up your deposit.
The VA Loan Guidelines
Besides the fact that the VA doesn’t require earnest money deposits, there are other flexible VA loan guidelines you should know:
- You’ll need a credit score of at least 620, although this may vary by lender. Some lenders require a higher score.
- You’ll need to prove you have a Certificate of Entitlement. This proves you served enough time in the military to be eligible for a VA loan.
- Your debt ratio cannot exceed 43%. This means your total monthly debts cannot exceed 43% of your gross monthly income.
- You must have stable income and employment.
- You must be able to prove your income with paystubs, W-2s, and/or tax returns.
- The home must pass the Minimum Property Requirements and be immediately livable.
- The home must be for owner occupancy.
The VA loan provides very flexible guidelines and does not require a down payment. If you do put earnest money down, you’ll get it back at the closing. You can also use it as a credit towards your closing costs. However, you do not have to put any money down on the home. The VA provides 100% financing at low-interest rates to make it easy for veterans to secure financing.