What You Need To Know About Deposits & Down Payments On A Purchase
When you write a contract to purchase a home, in the offer you’ll need to include a deposit amount, which you’ll agree to pay upon subject removal. This amount will then form part of the down payment upon closing.
This amount does NOT have to be a specific percentage of the purchase price – it can be as little as $500-$2,500 dollars. This deposit amount makes no difference in the legal obligation you’re bound to once the subjects are removed. As a result, the amount should not hold merit to whether your offer is more attractive. Please review this link from the Real Estate Council of BC http://www.recbc.ca/psm_section/acting-for-sellers/ and here is the info specific about deposits.
(i) Need for a Deposit
Contract law does not require that there be a deposit in order to create a binding Contract of Purchase and Sale. The requirement that a contract includes some form of consideration is satisfied by the mutual exchange of promises by the seller and the buyer. However, it has long been recognized that including a deposit, often an amount between 5% and 10% of the offered price, represents an expression of the serious intention of the buyer.
The Council is aware that some buyers’ agents are drafting offers that do not provide for any deposit to be paid until after subject removal. One reason stated is a concern that the seller will not authorize the release of the deposit to the buyer if the buyer does not remove the subject clauses.
Some consumers, and perhaps even some licensees, are under the misconception that a Contract of Purchase and Sale is not binding on the parties until all subjects have been removed. The obligations under a contract are created once there has been an offer and acceptance (including counter-offers, if any). Some buyers believe that not including a deposit makes it easier for them to not proceed, if they choose, with their obligations under the agreement.
Buyers’ agents need to be cautious that buyers do not assume that, by not providing an initial deposit, they have somehow diminished their responsibility to make best efforts to satisfy the terms and conditions of the contract and to remove subject clauses.
It is the Council’s view that listing brokerages, in situations where buyers offer no deposit until removal of subject clauses, should advise sellers of the merits of a deposit being received from buyers. Increasing a deposit can be accomplished by way of a counter-offer from the seller.
As you can see, although it has become common for people to use 5-10% it is not required, and a seller can not just keep the deposit if something goes wrong.
This is especially helpful when the proceeds are coming from the sale of your property and you don’t want to pull money off of a credit card or line of credit – particularly in light of new mortgage changes that could give the lender the right to pull the approval if your balances owing on your credit report increase before closing.
There are some new developments if you purchase a brand new property that requires specific structures for the deposit, which can be staggered in stages and would require you to provide higher deposit amounts. Your realtor may, however, be able to negotiate different terms. This should be discussed upfront during the pre-approval process to ensure you protect yourself to the best of your ability by making a manageable deposit amount.
Sources for deposit/down payment and timeline considerations:
RRSP – You’ll need to bring a Home Buyers’ Plan (HBP) withdrawal form to the lender that holds the RRSP, and give them 7-10 days to release your funds. See the form here: http://www.cra-arc.gc.ca/E/pbg/tf/t1036/README.html
Investments – Best to allow 7-10 days as the required timeframe ranges depending on where investments are held. You must also ensure the market value is as expected upon cashing out your funds
Savings – Straightforward withdrawal
Gift – A gift letter will be required (most lenders have their own forms they want you to use) and then verification of the deposit into your account. Keep in mind that any deposit into your account above $2,500 is subject to further documentation. And if the gift is large, the lender has the right to seek further verification in accordance with the anti-money laundering act and OFSI guidelines (those who lend the gold make the golden rules!)
Upon subject removal, you’ll need to provide certified funds to your realtor and forward a copy of the receipt to your Accredited Mortgage Professional (AMP) who is getting the mortgage approved for you.
Your Dominion Lending Centres mortgage professional is here to help guide you through the mortgage process, and give you clarity throughout each step of the home-buying process.