If you’re a first time home buyer and on the hunt for a new home, you’ll need a crash course on how house deposits work. Read this article to find out more.
What is the Deposit on a Home?
When submitting an offer on a house or condo, you will need to make a deposit payment up front, usually within 24 hours of your offer being accepted. This is different than your down payment on the home, and the amount varies depending on the home you’re purchasing.
The Deposit vs. the Down Payment
When your offer is accepted by the home seller, you will be required to pay a deposit to the seller’s real estate brokerage in trust. This means the brokerage maintains a trust bank account which ensures the money is safe and secure. The deposit signals to the seller that you’re serious about purchasing the home and that this money will be held in trust by their real estate brokerage and eventually applied to the sale price of the home. The deposit is not and should not be paid directly to the seller.
The down-payment is an amount the lender or bank requires you to pay by the closing date of your purchase if you’re getting a mortgage. This is paid to your lender (e.g. the bank) and is applied to the purchase price which reduces the overall amount that you are borrowing in the form of a mortgage.
Banks rarely—if ever provide a mortgage for the full amount of the home—you need to provide a down payment to them first.
When Does a Deposit Need to be Paid?
Typically, when you submit an offer on a home, it is agreed upon that you will pay the deposit within 24 hours after acceptance of your offer by the sellers. However some real estate brokerages instead ask that you submit a deposit herewith your offer—meaning at the same time as the offer is submitted.
Remember: even if your offer is conditional, you are still required to pay the deposit. If, for whatever reason your purchase doesn’t firm up (due to your condition of finance or inspection or whatever other conditions you may have included), you will sign a Termination and Mutual Release, and your deposit will be returned to you.
How Can a Deposit on a Home be Paid?
EFT, wire transfer or direct deposit
Some brokerages (like Revel Realty Inc.) prefer that all deposits be paid electronically. For instance buyers can submit payment by Electronic Funds Transfer (EFT), Wire Transfer, or even through direct deposit into the brokerage’s account.
Bank drafts, certified cheques or email transfer
Depending on the amount, other brokerages still accept bank drafts, certified cheques or instalments via email transfer. In cases like this the seller’s real estate brokerage will provide you or your agent with instructions as to what they require.
Never pay a deposit directly to the seller
Pro Tip! Never pay a deposit directly to the seller. The money is better protected when it is in the real estate brokerage’s trust account and is covered by actual legislation. If the deposit were paid directly to the seller, they could take that money and spend it, and the buyer would have little recourse.
What Happens After I Submit My Deposit?
After you submit your deposit, the seller’s real estate brokerage will provide you with an official receipt. This receipt will let you rest assured that they’ve received the funds. The money will be held in the trust until the house closes and the money will be applied to the purchase price of your home.
How Much on the Deposit Do I Need to Pay?
Every listing is different so the amount of the deposit you have to pay will vary by each sale. You may see listings that request a $10,000 deposit, and you may see others requesting a $50,000 deposit. This varies from case to case but your REALTOR® should be able to direct you.
Remember, this deposit can be negotiated as part of your offer just like the purchase price can too. But keep in mind the seller will want a large deposit payment while you probably would rather pay a smaller deposit up front and make it easier on your wallet. The amount of the deposit only really comes into play if the house ends up not closing.
What Happens to the Deposit if the House Doesn’t Close?
When a house doesn’t end up closing it doesn’t automatically mean the seller gets to keep the buyer’s deposit payment. That’s often a misconception. Likewise, the buyer doesn’t get their deposit returned immediately if it’s the seller’s fault for the home not closing.
In fact, the deposit will only be released if a Mutual Release is signed by both parties. In a worst-case scenario this may end up in front of a judge and be decided by a court order.
What Happens if I Don’t Pay the Deposit?
Typically deposits are requires to be paid within 24 hours/one banking day. Saturdays, Sundays and bank holidays don’t count. This can be negotiated on the agreement of sale, if more time will be needed.
Paying the deposit late
If a buyer pays a deposit late then the seller does have the option to cancel the deal – so that’s why it’s important for you to make sure you get your deposit paid in a timely fashion. You don’t want you to lose out on your purchase because of a late deposit payment.
Can a Buyer Back Out of a Deal by not Paying the Deposit?
Once your offer has been accepted by the seller, there’s no backing out. You’ve committed. The payment of the deposit on the home is a legal contract to purchase their home.
The seller can cancel the deal
Even though it’s a legal contract, the seller can cancel the deal if you never pay the deposit. But remember: not paying would also open you up to legal ramifications and you could be taken to court and sued. It’s definitely not a situation you want to end up in.
We Can Help
Deposits, down payments and legal ramifications—there is a lot to know when buying a home. That’s why we always recommend you use a REALTOR®. A real estate agent will walk you through every step of the process while keeping your best interests in mind.
Did you know that it doesn’t cost you anything to use a REALTOR® to help buy your home? Read our blog on Why You Should Use a REALTOR® When Buying or Selling A Home. And as always, I invite you to give me a call if you have any questions!