I take it by your question that the seller wants to to make a "good faith deposit" of 3.5% of the purchase price when you sign the Purchase and Sale Agreement. Typically, homeowners want you to put something down as "good faith" that you'll complete the transaction. In return, they take their home off the market and no longer offer it for sale. If for some reason you fail to properly complete the transaction (i.e., failed to apply for a mortgage, etc.) and withdraw, the sellers will keep your deposit.
If you do go through with the purchase, then the 3.5% deposit that you made will be applied towards whatever down payment and/or closing costs you may have.
In this case, you are applying for a VA loan. I presume that you are seeking 100% financing. In addition, I further presume the VA funding fee will be rolled into the mortgage. That leaves closing costs. What happens is the 3.5% down payment will be applied towards your closing costs. If your closing costs amount to less than the 3.5% down payment, then what is not spent will be returned to you at the settlement table. If the seller is paying your closing costs (or a portion of it), then the seller's proceeds will first be applied to your closing costs before you make any contributions. Again, whatever funds remain from the initial 3.5% deposit you made will be returned to you at settlement.
Hope this helps.