Categories
RelocationAt closing, your earnest money deposit is credited toward what you owe, which on a VA loan is usually closing costs rather than a down payment. If the deposit is more than you owe, because the seller covered some or all of your costs, the difference is returned to you.
A VA loan is zero down. That part is real. But there are still three times you pay out of pocket during a purchase, and one point at the end where some of that money can come back.
The easiest way to see it is to follow one buyer through escrow. Picture a military family with PCS orders to San Diego North County, buying a $700,000 home with a VA loan. Here is what leaves their account, when, and what happens to it.
Within days of acceptance: the earnest money deposit
The offer gets accepted, and the first check follows within about three business days. This is the earnest money deposit, usually called the EMD.
In this family's case it is 1% of the purchase price, so about $7,000. California contracts commonly run anywhere from 1% to 3%, and the amount can move up or down with the situation. A competitive house may call for more.
What it is: good faith money. It tells the seller you are serious. What it is not: a payment to the seller. It sits in escrow for the whole transaction, and that matters at the end of this story.
Weeks one and two: the home inspection
Early in escrow, the family pays for a general home inspection. Around here, that commonly runs about $500 to $600 for a typical home. This is where you pay someone to find every problem in the property so you know exactly what you are buying.
VA does not require it. Get it anyway. It is for your protection, not the lender's. If the inspector finds something that needs a deeper look, like the sewer line or the roof, that is where a specialist comes in, and specialists cost extra.
One charge the short version of this usually skips: the VA appraisal. Your lender orders it, typically collects the fee upfront, and in California it generally lands around $750 to $1,100. Like the inspection, it does not come back. The full list of when money leaves your account is broken down on the blog.
End of escrow: closing costs
Near the end, all the fees add up to one number that has to be paid to close. Lender charges, title, escrow, recording, prepaid taxes and insurance. Estimates for VA closing costs vary by source, commonly somewhere between 2% and 5% of the loan amount depending on what gets counted.
The VA funding fee is the largest single charge for most first-time users, but it is usually rolled into the loan, so it does not show up as cash. Veterans receiving disability compensation are exempt from it entirely.
For this walkthrough, say the family's closing costs and prepaids come to $14,000, not counting the financed funding fee. That number is illustrative. Your Loan Estimate will show your real one.
Where the deposit comes back into play
Here is the part most buyers miss. That $7,000 deposit has been sitting in escrow the entire time, and at closing it gets applied to the $14,000. What happens next depends on how much the seller agreed to cover.
| Seller credit negotiated | Closing costs left | Deposit applied | What happens |
|---|---|---|---|
| $0 | $14,000 | $7,000 | Family brings $7,000 more to close |
| $10,000 | $4,000 | $4,000 | $3,000 of the deposit comes back to them |
| $14,000 | $0 | $0 | The full $7,000 deposit comes back to them |
Same house, same loan, three very different checkbooks. The difference is negotiation.
How the seller ends up paying
A seller credit is something you ask for in the offer or negotiate during escrow. On a VA loan, the seller can pay your normal closing costs with no percentage cap. Certain extras, like paying your funding fee or buying down your rate, fall under a separate 4% limit.
Two rules keep this honest. A seller credit can never be larger than your actual closing costs, and it can never become extra cash in your pocket. The only money that comes back to you is your own deposit.
Whether a seller will agree depends on the market and the house. Nationally, concessions have shown up in a large share of recent sales, but coastal California has been the exception, so do not assume it. Ask, and structure the offer so the ask makes sense.
Pro Tip: Even if you expect the seller to cover everything, budget the deposit as money you will not have for the whole escrow. It comes back at the end, not when the seller agrees to the credit. For a PCS family paying for a move at the same time, that timing is what catches people.
Ask Your Escrow Officer This
Two questions, word for word, once you are in escrow:
- "If my deposit is more than I owe at closing, how and when does the difference come back to me?"
- "Can you send me an estimated settlement statement before I sign, so I can see exactly where my deposit was applied?"
Whether you are a veteran using a VA loan, a family on PCS orders, or a first-time buyer working through this for the first time, reach out and I will run these numbers on the home you are looking at. You can also call me at (619) 485-8293.
Frequently Asked Questions
Do I get my earnest money back if the seller pays my closing costs?
Yes, to the extent the seller's credit covers what you owe. Your deposit is applied after the credit, and anything left over is returned to you at closing.
Is the home inspection fee refunded at closing?
No. The inspection is paid directly to the inspector early in escrow and is not credited back. The same is true of the VA appraisal fee once the appraisal is done.
Can the seller pay all of my closing costs on a VA loan?
The seller can pay your normal closing costs with no VA percentage cap, though certain concessions are limited to 4%. The credit cannot exceed your actual costs, and whether a seller agrees is a negotiation.
How much is earnest money on a VA loan in California?
VA does not set it. California contracts commonly use 1% to 3% of the purchase price, so roughly $7,000 to $21,000 on a $700,000 home, depending on the situation.
This content is for informational purposes only and is not legal or financial advice. Figures shown are illustrative, and actual costs vary by lender, property, and transaction. Review your Loan Estimate and Closing Disclosure with your lender. All real estate services comply with NAR, HUD, and California DRE regulations.
