When your offer on a home or condo is accepted, you might be surprised when your real estate agent asks you to include a small deposit with it. Not to be confused with your down payment, a deposit is essentially an offer of good faith to the seller that you are serious about purchasing their home – even though you still want to get a home inspection and your mortgage financing in place, before signing on the dotted line.
Once you sign the accepted offer, the deposit is applied against the purchase price of the home – so it’s not technically an “extra cost”, but it’s still a part of your home buying budget. How much should your deposit be and where does it go when you make it? Let’s take a look.
How much is a typical deposit?
There isn’t really a set amount, but your real estate agent may request something in the range of 1% of the purchase price. For example, if you bought a home for $300,000, your agent could request $3,000 for the deposit.
One exception to this rule is if you’re buying in Toronto, where it’s customary to give a 5% deposit. For some people, this might be their entire down payment – and it’s a serious chunk of change. For this reason, you want to be certain you’re serious about the home, because if you back out for any reason, the seller can actually keep the deposit.
When do I pay the deposit?
The deposit is paid when you sign an accepted Offer to Purchase (meaning the seller has accepted your offer and wants to move forward), but before your home inspection and mortgage financing are done.
Who do I give the deposit to and where does it go?
You’ll give your deposit to your real estate agent, when you’re signing the paperwork for your accepted offer. Your agent then passes it off to the seller’s real estate agent, who it stays with until closing day. On closing day, the amount is applied against the purchase price (so it’s essentially considered part of your down payment).
What happens if the house doesn’t close?
If you back out of the purchase for any reason, the seller may be able to keep your deposit. Remember, at this point, they’ve stopped accepting offers from other people. In the time it took for you to decide not to go through with your offer, they may have missed out on other ones. If you’re handing over between 1% and 5% of the purchase price of a home upfront, you want to be certain it’s for the right home for you; losing that amount of cash could take a serious bite out of your home buying budget, and set you back for months. We don’t want this to scare you – we just want you to be conscious of how big this decision is, so you can protect yourself (and your savings).