From a seller’s perspective, a deposit is a sign of good faith that the buyer, who has contracted to purchase the property, will complete the transaction on the date specified in the contract.
It is important to distinguish the difference between the deposit and the down payment, the down payment is the equity one contributes to the transaction at closing, the deposit is short term and held in trust and applied towards the down payment at closing.
As a Mortgage Broker I do not facilitate this deposit myself because banks do not have a program for it but it does overlap with the process that I do, so I think it's important to talk about early in the process.
When does a deposit have to be paid?
The standard agreement of purchase and sale states that the deposit must be submitted “herewith” or “within 24 hours of the acceptance of this Agreement”. Neither alternative is legislated but an accepted good practice.
The reason that buyers are encouraged to come up with the deposit immediately is to demonstrate to the seller commitment to complete the transaction.
In a tight market where multiple offers are likely, a cheque payable to the sellers realty co in trust may also be expected at the time of offer.
How large of a deposit is required when making an offer?
This is an initial decision of the buyer which must be agreed to by the seller, from a seller’s perspective, a deposit is a sign of good faith that the buyer, who has contracted to purchase the property, will complete the transaction on the date specified in the contract. and on time.
While there is no right answer or minimum amount required, in the Metro Vancouver area 5% is generally the rule of thumb as on purchases upwards of 1 million dollars for an average detached home this can present a last minute cash crunch.
I won't go into too much detail about the intricacies of the deposit as that is something a good Realtor will cover, my focus here is only to point out how quickly it may be needed and that is can be sizable.
What options are there for home buyers who do not have this cash on hand?
Unfortunately, not too many. Most people I see caught in this cash crunch are people that are in between selling a home and buying a new one, their equity is locked in the existing home until the sale is executed. A common request I get is for a "bridge loan" from the mortgage lender but bridge loans can only "bridge" the gap for the down payment (where the buyer has to complete on a purchase in advance of the sale of their existing home).
Borrow from a family member or friend, this has to be disclosed to the lender and provisioned to be repaid at funding.
Borrow from a line of credit or some other credit facility already available to you
Liquidate savings short term
Borrow from a deposit loan company, this involves fees and borrowing costs but could be a solution for anyone who doesn't have the short term access needed.
