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

Consideration is a legal concept meaning something of value that is given in exchange for a performance or a promise to perform.

Also known as a good faith deposit, a binder or EMD. A fee that is usually a fixed amount that’s standard in the community where you’re buying.

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. A 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.

Consideration is also called “earnest money deposit”. Consideration can be anything of value as long as the receiver accepts. The amount of consideration can vary widely depending on local custom. Earnest money deposit is consideration in that the EMD is pledged to the seller but given to escrow for a promise to perform. The sellers 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 buyers consideration). The seller will agree to sell the home to the buyer (sellers consideration). Consideration can be refunded in part or in whole depending on the transaction. Consideration is held by a third party (usually) escrow or an attorney.

Earnest Money Deposit 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 buyers representation.

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

The VA will not provide EMD. The Earnest Money Deposit is the buyers 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 if the escrow is closed. The definition of closed in this section means no longer open. Closed can include a completed transaction or a cancellation. In most transactions the Earnest Money Deposit will not be allowed to be kept by the seller if the property does not pass the VA appraisal and inspection standards. 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.

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