Deposit vs. Down Payment When Buying a House
Buyers are sometimes confused on the difference between a deposit and a down payment. Realtors often don’t explain this difference very well to buyers, and we want to rectify that right now.
Let’s start with the down payment.
A down payment is the amount of your own money you put toward the price of a home and it’s usually talked about as a percentage of the purchase price. You would say something like “I have 5% down” or “I have 10% down” or “25%”. Meaning you come up with 5, 10 or 25% of the funds to purchase and then the bank or lender, will be supplying the rest of the unds. Putting down more cash upfront reduces the amount of money you have to borrow, which means a lower monthly payment. If you put down less, then it means a higher monthly payment.
Alternatively, a Deposit is good faith money that is put down by the buyer upon a successful agreement of purchase and sale for a home. This could be $5,000, $10,000, $50,000, whatever is negotiated. These funds then form a part of your down payment, when then forms part of your purchase price.
In a nutshell, a deposit is generally part of a down payment on a house, and the down payment in turn is part of the purchase price of a house.
Let’s look at an example. A $500,000 home: if you are putting 5 percent down on this $500,000 home, then 5% or $25,000 is the total of your down payment. That is how much you will need to come up with to pay for the home on your completion date. Now, when you write an offer on a home, you will be asked by the Realtor for a deposit. Let’s say of $10,000. It could be more, it could be less, that is all part of the negotiations between you and the seller. In this example, you will submit your $10,000 deposit either with your offer or within a certain time frame, and that $10,000 will sit in the real estate company’s trust account until such time as you pay for your house. Then when you pay for your house on your completion date, you will have to come up with the rest of your $25,000 down payment - so another $15,000, because the first $10,000 has already been paid into trust as your deposit. Then the rest of the house money, the 95% or in this example $475,000, will come from your lender.
Sometimes the deposit and the down payment could be the same number if the buyer has offered the seller a big deposit to make their offer look more attractive. Even though the Seller has no right to that deposit until the completion date, in most cases anyways, it still shows that the buyer is uber serious if they offer a big deposit upfront.
Now there are other costs associated with purchasing a house, and so these numbers aren’t going to work out exactly like this as you still have to pay for things like CMHC insurance premiums, home inspections, Property Transfer Tax (unless you qualify for an exemption), etc., however for the purpose of explaining the difference between the terms deposit and down payment - this is a good example.
Be sure to watch our video on 8 Creative Ways to Save a Down Payment here: https://youtu.be/an5ZCTewpR0