Deposit and down payment, what is the difference between them? Is there a set amount for each? When you submit them, where does the money go? Let’s take a look at both of these in more detail so you understand where your money is going.
First, what is a deposit.
When you purchase a property, you must submit your deposit within 24 hours of the offer being accepted. Make sure you have your deposit ready when you submit your offer. Have it in an account that you can easily transfer the money from. You do not want the funds in stocks or bonds or an account that will take more than 24 hours to get the funds from. If you do not submit the deposit within these 24 hours, the seller has the right to find you in breach of the terms or the contract. This will allow them to not only back out of the deal, but they could come after you for damages. Make sure you have the funds ready to go.
While there is not a set amount for the deposit, you may typically see the listing agent requesting $5,000, $10,000, and in some cases significantly more. Some agents ask for a percentage while others ask for a set amount that would cover the commission rates of the agents included in the transaction. Regardless of what the listing agent is requesting, you can submit any amount you feel comfortable with. Keep in mind though that a lower amount may weaken, and conversely a larger amount may strengthen your offer. The reason the deposit affects the appeal of your offer is because it shows you have “skin in the game”, or in other words, you stand to lose some if not all of the deposit in certain conditions. Allow me to clarify…
You submit an offer with a finance and home inspection clause, it is accepted, you submit your deposit and now the property is conditionally sold. If at this point you back out of the offer – your finance falls through or you find something in the home inspection – your deposit is returned without any deductions at all. If however you fulfill both finance and inspection, the deal goes firm. The house is no longer considered “conditionally sold”. It is for all intents and purposes sold. If at this point the buyer decides to back out of the purchase for any reason what so ever, they stand to lose a portion if not all of the deposit. The seller may choose to sue for damages on top of the deposit as well, but that is something we can discuss another day.
Let’s say you have a portion of your funds available, but the remainder is locked up and requires a week for them to be released. You can submit the funds you have available within 24 hours of the offer being accepted, and pay an additional deposit at a later date specified. This is not ideal, but it is a stronger offer than not having an additional deposit. In this case it is important to communicate with the listing agent to explain the circumstances.
Once you submit your deposit, where does the money go?
The listing agent’s brokerage holds the deposit in a bank account. It does not get released until closing. The account that the funds are being held in will collect interest. Who gets the interest? The listing brokerage will have it explained in detail within the offer, but usually they will keep the interest if it accumulates to a total less than a certain amount. This amount is usually around $100 to $150 dollars.
Where does the deposit go on closing?
The funds from the deposit are put towards the down payment of the property upon closing. If your down payment was going to be $120,000 and your deposit was $20,000, then you submit the $20,000 deposit within 24 hours of acceptance to the listing brokerage and the remaining $100,000 on closing. Your lawyer will deal with both the deposit and down payment, transferring the money around to the appropriate people at the time of closing.
What is the down payment?
The down payment is how much money you have saved up and are able to put towards the purchase of the property. The lender covers the difference between your down payment and the actual cost of the home. This amount is called the mortgage. As an example, let’s say you purchase a property for $600,000 to keep the math simple. You have saved $120,000 to go towards the purchase. That leaves a difference of $480,000 which the lender will provide as your mortgage.
There are options and considerations regarding the affordability of a down payment. You can read more about the amount of the down payment here: https://ryanligeza.com/5-down-verses-20/
There are also options to discuss with your mortgage broker for first time home buyers as well.
Hopefully this helps you understand the difference between a deposit and down payment. If you have any further questions or concerns, please send me an email or give me a call. I would be happy to meet you for a coffee or discuss over the phone.
