Purchase offer goes toward down payment

Courtesy Toronto Star
By Joseph Richer Registrar Real Estate Council of Ontario May 2014

I’m getting ready to buy my first home but I don’t understand the difference between a deposit and a down payment. Are they the same thing?

First off, I commend you for taking the initiative to ask questions and get informed before starting your house hunt. It’s a smart move and will help you make knowledgeable decisions as you go through the buying process.

Now, onto the difference between a deposit and a down payment: a deposit is associated with your offer to purchase a home, while the down payment is associated with your mortgage. The deposit will go toward your down payment.

When you submit an offer to buy a home, a deposit is typically required. This shows the seller that your offer is in good faith and you intend to close the deal. There is no minimum amount or typical amount for the deposit. It’s usually guided by local market conditions and the value of the home you’re buying. Your real estate professional can suggest an appropriate deposit amount.

A deposit may be due at the time the offer is made, or alternatively, “upon acceptance” of the offer (typically meaning within 24 hours of acceptance). A deposit does not have to be in the form of a certified cheque or bank draft, but some sellers will request this as a further show of good faith.

In hot housing markets, where competing offers are involved, a larger deposit is sometimes seen as a more attractive aspect of an offer. It may be an important factor for the sellers in determining which offer they will choose to accept. But it does not change the legalities of what will happen to the deposit if the deal does not close.

When working with a registered real estate professional, once your offer is accepted by the seller, your deposit will typically be held in trust by the seller’s brokerage. The Agreement of Purchase and Sale will outline where your deposit will be held and the terms of the trust agreement.

In Ontario, all brokers and salespeople are required to participate in an insurance program that includes consumer deposit insurance. That means if you are dealing with a registered real estate brokerage, your deposit is held in trust and you have protection in the unlikely event of fraud, insolvency or misappropriation of funds.

Deposit trust money held by a brokerage is required to be kept in a separate real estate trust account and paid out only in accordance with the terms of the agreement, which is typically upon closing of the transaction. In situations where a transaction does not successfully close, you may need to seek legal advice about the process for releasing the deposit money from the trust account.

When the time comes to close on your home, the money from your deposit will be credited towards the purchase price and become part of your down payment.

The down payment is the portion of the purchase price that will not be financed through a mortgage — it’s paid out of your pocket. Based on the current lending guidelines, you typically must put down at least five per cent of the purchase price of your home. Your mortgage loan may cover the remainder of the purchase price.

If your down payment is less than 20 per cent, you will be required to purchase mortgage loan insurance. The insurance premium is calculated based on the amount you are borrowing and the percentage of the home’s purchase price that is financed by a mortgage (called the “loan-to-value ratio”). The premium can be paid in a single lump sum or it can be added to your mortgage and included in your monthly payments. If your down payment is more than 20 per cent, you don’t need to purchase mortgage loan insurance.

While budgeting for your deposit and down payment is a smart move, it’s important to remember that these are just a few of the many costs associated with home ownership.

Take the time to learn about all of the costs that come with buying and maintaining the home you are interested in, to ensure you are prepared. A good first step is visiting RECO’s YouTube channel (www.youtube.com/RECOhelps ) and watching the Budgeting for Closing Costs video.

Joseph Richer is registrar of the Real Estate Council of Ontario (RECO). He oversees and enforces all rules governing real estate professionals in Ontario. Email questions to askjoe@reco.on.ca . Find more tips at reco.on.ca, follow on Twitter @RECOhelps or on YouTube at http://www.youtube.com/RECOhelps .