We all know that buying a property can be overwhelming - it is a huge investment of your hard earned money. When it comes to your deposit, it is totally understandable that you want to know who does what and where that large sum of money that is your deposit is going. By knowing all the ins and outs of the life of your deposit will hopefully give you some peace of mind. Typically, when purchasing you are required to put a deposit down through your realtor. Buyers are typically relieved to find out that their deposit counts towards their overall down payment & closing costs.
As the buyer – when an Agreement of Purchase and Sale is made, your deposit serves the main purpose of providing security to the seller. This reassures the seller that you are serious about your offer and not as likely to back out of the transaction once things are finalized.
There is no predetermined amount required by law, however, ‘acceptable’ varies depending on location. Typically your deposit is due within 24 hours of the Agreement of Purchase and Sale being accepted. If you are seriously considering putting an offer and accepting a house, you should have your deposit ready.
So you’ve found a property, you have an accepted Agreement of Purchase and Sale, and you are ready to provide your deposit, but where does it go?
To the Realtor
Your deposit will start at the listing brokerage. This money will be held in the brokerage’s trust, but don’t worry, these accounts are regulated and audited. The money held in these accounts does not go toward the brokerage’s overhead expenses. While your money is sitting in trust (until it makes its way to the solicitor) it will be insured in the event a claim needs to be made (this is extremely rare).
If the offer is dependent on your ability to obtain financing and you are unable to do so, your deposit would be returned to you in full, without any penalties unless your Agreement of Purchase and Sale states otherwise (read everything before signing!)
The deposit has left the listing brokerage, where does it go now?
To Your Lawyer
Once all conditions of the sale are met and you are getting everything in order to close your property, your deposit will be transferred and held by your lawyer.
The deposit is applied to the final purchase price on closing day and becomes part of your down payment (varying between 5%-20%. This is decided by you and your mortgage broker). The deposit will be taken into account when arranging financing. Your lawyer will prepare a statement of adjustments, to let you know how much is owed upon closing OR if no financing was required, your closing costs would come out of the deposit and the difference would be given back to you by your lawyer.
Your lawyer should contact you prior to closing to review all documents with you showing where the deposit was taken into consideration.
Final Thoughts
A deposit is part of your down payment and is made in good faith to show sellers you are a serious buyer. The money is then held in trust (not given to the seller) until the mutually agreed upon closing date. By utilizing intermediate holders, it protects you and the buyer throughout the purchase process. The deposit you give is insured all the way through until close when it is handed off to the seller. When speaking with your mortgage agent ensure you provide proof of deposit so they can factor this in when qualifying you for a mortgage and add it to your down payment.