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The differences between a deposit and a down payment

When you are in the market for a home, you may hear people using the terms deposit and down payment interchangeably. However, to do so is a mistake. These terms are actually distinctly different and play different roles in real estate transactions. Deposits come first and occur when you make a formal offer on a property. It's an act of good faith. You're showing the seller your real interest.

With the real estate market as it is these days, gone are the times when a prospective purchaser can plunk down $100 with an offer to purchase. In many instances where there are multiple offers on the table, a sizable deposit may actually make or break your offer. Depending upon the other terms in the offer, a vendor is more likely to accept an offer with a $5,000 deposit, rather than one that is $500, although it's still up to you as a purchaser as to what you offer as a deposit.

If the vendor accepts your offer

The vendor's realtor will hold your deposit in trust if the purchaser gives your offer the thumbs up, except for cases where both parties agree to other terms. There is protection for your money via an insurance program from the Real Estate Council of Ontario (RECO).

This is when the down payment will come into play. While a deposit secures your offer, your down payment is what you put toward the purchase price to secure financing. First time home buyers in Ontario can have as little as 5 percent down with mortgage insurance from the Canada Mortgage and Housing Corporation (CMHC).

Both purchasers and sellers may benefit from understanding the following prudent information regarding deposits and down payments:

  • Deposits aren't refundable in most instances.
  • As a purchaser, you may want to think twice about paying a deposit to the seller directly.
  • Deposits can accompany an offer, can be given once a seller accepts an offer or can occur at a time both the seller and purchaser agree upon.
  • Down payment amounts can vary according to the purchase price of a property.
  • Walking away from a deal could potentially result in a lawsuit from the seller along with the loss of your deposit.

Where to find support

The world of real estate is full of jargon and terms that may be confusing. Fortunately, there are resources available to you as you make your way through this realm either as a purchaser or a seller. An Ontario lawyer experienced in real estate law can help you gain an understanding of all the intricacies involved, guide you through the process of buying or selling a home, and is equipped to deal with any disputes or issues that may arise.

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