What is the difference between a deposit and a down payment in real estate?

This is a great question. Although the terms “deposit” and “down payment” are sometimes used interchangeably, they are not the same.

Since deposits come before down payments, let’s start there. A deposit is the money you submit during the offer process when trying to secure a property you want to buy. This shows the seller that you are serious about the deal and it’s considered a show of good faith. Providing a deposit also demonstrates that you have the financial means to make the purchase and you are comfortable taking on some degree of risk until the deal closes.

However, you should know that in most cases a deposit is non-refundable once conditions to an offer, if any, have been fulfilled or waived.

While there is no standard amount for a deposit, your real estate representative can negotiate this with the seller’s rep, along with the timing of any payment(s). Deposits can be due when an offer is made, once an offer is accepted, or another agreed-upon time — and can be in staggered installments. This should all be captured in the written terms of your offer and the eventual agreement.

If your purchase offer is accepted, the Real Estate and Business Brokers Act, 2002 (REBBA) requires that the deposit be held in trust until it becomes payable. This account is typically with the seller’s brokerage.

The Real Estate Council of Ontario (RECO) administers an insurance program, which includes coverage for consumer deposits. All brokers and salespeople must participate in the program. However, the coverage is not applicable to deposits given to, or held by, individuals or companies not registered with RECO. This is important to consider, especially if you are ever asked to pay a deposit directly to a seller.

Once the deal closes, your deposit is applied towards the home’s total purchase price.

A down payment, on the other hand, is usually a combination of your deposit and any other money you pay toward the purchase price, while the balance owing is typically covered by mortgage financing.

One vital factor to be aware of is that a lender’s appraisal can limit how much they loan you for a specific property, despite the price you may have agreed to pay the seller. Discuss this with your salesperson to assess if you would like to add a financing clause in your offer.

Down payment requirements can vary to be eligible for financing. I encourage you to visit the Canada Mortgage and Housing Corporation website, or talk to your financial adviser and mortgage specialist to learn more about minimum down payment requirements as well as mortgage insurance requirements that may apply to down payments below a certain value.

Buying real estate is a serious commitment and I strongly recommend working with a real estate salesperson who can help you navigate the negotiations, as well as a real estate lawyer.

This column is for general information purposes only and is not meant as legal or professional advice on real estate transactions.

Joseph Richer is Registrar of the Real Estate Council of Ontario (RECO). He is in charge of the administration and enforcement of all rules that govern real estate professionals in Ontario. You can find more tips at reco.on.ca, follow on Twitter @RECOhelps or on YouTube at http://www.youtube.com/RECOhelps.

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