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Deposit vs Down Payment

Updated: Jan 17, 2022

The deposit is different from a down payment. Often buyers get these two items mixed up or confused. A down payment is at least 5% of the purchase price, sometimes 20% or more depending on how you want the transaction to go and if you want or need to pay for mortgage insurance. The down payment is handled by your mortgage broker / bank when the house is closed.

A deposit is a sum of money that the buyer will send to the listing brokerage to be held in their trust account until the house is closed or returned to the buyer if a condition is not fulfilled. It is usually transferred within 24 hours of an offer being accepted.

A deposit is not returned to the buyer if the buyer backs out of a deal without a good reason for doing so. A seller may also choose to sue a buyer for damages if the buyer backs out of a signed and accepted deal. It is never a good idea to walk away from a deal once it has all been accepted.

If a condition of the offer is not met, then the deposit will be returned to the buyer. Usually this is done without any interest earned. Typical conditions are home inspection and mortgage financing. If the buyer is not satisfied with what the home inspection discovers or if the bank will not provide the buyer with the financing they need, and there were conditions in the offer stating that these must be done, then the buyer can back out of the deal and have the deposit returned.,

The amount of the deposit is entirely up to the buyer making the offer. The amount of the deposit will be subtracted from the sale price, with just the remainder being due upon closing. Example: Sale price is $100. Deposit is $1. $99 is due on closing. The deposit could be $100, it could be $50,000 or more!

The deposit is an insurance to the seller that the buyer is serious and committed to buying the property. The more the deposit amount, the less likely the buyer will walk away from the deal before it is closed. They will be less inclined to leave a deal if they leave behind a large deposit! When comparing competing offers, if two are more or less the same in all aspects except the deposit amount, the seller will almost certainly choose the one with the higher deposit amount.

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