Published: April 11, 2016 • Last updated: June 23, 2022 at 22:11 pm
First-time buyers can sometimes get confused by the terminology. For example, they understand you have to make a deposit when your Offer to Purchase is accepted, but may not be sure if this deposit is included in or separate from their down payment.
This came to light recently when their real estate agent advised a couple I know to make a deposit of five percent of the purchase price with their offer, while coincidentally applying for a mortgage with exactly a five percent down payment.
Does this mean they will actually need a total of ten percent of the house price to buy their first home? The answer is no, and I will explain below.
Fear not…..whatever amount you give as a deposit at the time you make your offer is counted towards your down payment requirement.
So if you actually deposited 5% of the purchase price, you would only require closing costs at the date of funding your mortgage since your down payment would already be taken care of.
A couple of practical considerations…
- You use your savings to come up with the deposit. For areas like Caledon and Mississauga and Brampton, I have seen other clients recently make deposits of $10,000, and that has been satisfactory.
- It’s true the larger the deposit, the more seriously the seller (and their agent) take your offer, but $10,000 is nothing to sneeze at. In Toronto itself and in situations where the home has been primed for heavy competition among buyers by deliberate underpricing, some realtors will agree that a five percent + deposit is a great idea.
Be guided by your real estate agent in this matter. When in a sellers’ market, the buying process can become quite cut-throat and stressful for everyone, not just first-time buyers.
Real estate agents well understand any offer they present must look as strong as possible. One obvious way is to make a large deposit with their offer. The theory is this demonstrates how serious the buyers are.
If two offers to buy a $500,000 home are identical, but Rodrigo offers a deposit of $10,000 and Noreen offers $25,000, you can bet the seller will look more favorably on Noreen.
It’s not only the psychological lift the offer gets (looks better but in reality is for the same price) but also it’s practical. God forbid the purchase transaction falls through after all conditions have been lifted. The seller will feel there is more recourse (or less hassle) to mitigate their damages from a larger deposit.
How can you make your offer attractive in a multi-offer situation?
- If an inspection is warranted, get one done prior to making your offer.
- Understand the sellers’ preferred closing date, and make sure your offer is for that date. If the house is empty, your offer will be looked on very favourably if you offer to close in only a few weeks. (Even if you are not ready to move in yourselves)
- Sellers love offers that do not have a condition of financing. Mortgage professionals sometimes pull their hair out, though when a firm offers hits their desk, yet mortgage approval is far from a done deal. This is where the voice of experience can help.
- While we are not a big fan of unconditional offers, it can be a fact of life in a sellers’ market. In most cases, a competent, veteran mortgage professional will be able to tell you whether or not it is a risk worth taking.
- If there is uncertainty, though, you should pay attention. You can always insert a condition of financing with only two or three days, rather than the usual five.
… but at least now you know that a deposit IS considered part of your down payment.
Do you have questions on this or any other topic? ASKROSS how he can help.
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Ross Taylor is recognized by his peers as one of Canada's pre-eminent difficult mortgage specialists. His ASKROSS blog and column in Canadian Mortgage Trends are focused on the intersection between mortgage financing and personal credit.
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