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What is Consideration (Earnest Money Deposit or Good Faith Deposit)?

piggy-bank-390528_960_720The majority of VA loans call for an earnest money deposit. Although no set guidelines exist for the total amount dictated in an EMD, commonly the deposit will be for a total of two percent of the property’s sale price. Generally, this sum is called for following the initial agreement of sale between the buyer and seller. The deposit will be held by a third party (Escrow), and allows the seller the opportunity to see your level of commitment to the sale by making a good faith monetary offering.

Also known as consideration or a good faith deposit, an earnest money deposit is a legal concept meaning something of value that is given in exchange for the performance or a promise to perform.

Consideration can be anything of value as long as the receiver accepts. The amount of consideration can vary widely depending on local custom. An earnest money deposit is consideration pledged to the seller but given to the escrow for a promise to perform. The seller’s consideration is to take the property off the market and place it into escrow.

For example, a buyer wants to purchase a home. A seller agrees to open escrow. The buyer will offer an earnest money deposit (this is the buyer’s consideration). The seller will agree to sell the home to the buyer (seller’s consideration). Consideration can be refunded in part or whole depending on the transaction. For non escrow states, consideration is held by an attorney.

Consideration is due at contract signing. When the Residential Purchase Agreement (RPA) is signed by the buyer, the buyer should also give a check for the Earnest Money Deposit (EMD). In many transactions, the EMD check will not be cashed until after the RPA has been 1) agreed upon and signed by the seller and 2) confirmed by buyer’s representation.

Once the EMD is cashed and held by neutral third party (almost always an escrow or attorney), the contract is valid.

According to Common Law, for a contract to be valid, there is a need to offer a thing of value. Consideration is not down payment. The down payment is a larger cash payment, figured as a percentage of the purchase price, which the buyer will bring to closing. VA home loans do not require a down payment.

The VA will not provide the EMD. The Earnest Money Deposit is the buyer’s responsibility.

The EMD may or may not be returned to the buyer. EMD refunds and closing costs are determined by what is negotiated and written in the RPA. If the EMD is returned, it will be because the escrow is closed. For the purpose of consideration, the definition of closed includes a completed transaction or a cancellation. In most transactions, if the property does not pass the VA appraisal or inspection standards, the seller will not be allowed to keep the good faith deposit. In the event that the property does not pass appraisal and habitability inspection, prior to refund, the cost of this will be deducted (along with any other buyer expense) from the EMD.

To apply for a VA loan, complete the VA home Loan Application located here.