Deposits vs Down payments
Posted by Michael Tourigny on
“ Aren’t the deposit and down payment the same thing?”
This is the most common source of confusion that we have encountered with buyers of new homes, as new build specialists.
Deposit: This is the amount of “ good faith” money that the builder/developer wants to see from the buyer to bind the purchase agreement. It is sometimes paid at the time of the offer (or shortly after) but more often paid after the satisfying of the conditions.
The amount varies based on the value of the purchase and the period of time that will transpire until the purchase completes. Often, if the completion date is years away (typical of new build condos) the total amount is paid in installments spread out over a stated amount of time.
The deposit money can be held either in a Realtor's trust account, a builder/developers trust account, lawyer/notary trust account, or directly by the builder/developer. It is important for you to know; where it is being held, is it earning interest? is it refundable and under what situations? If it is being used by the builder/developer to finance the construction, and if so, is it insured?
Regardless of all the above, it forms part of the purchase price and will be acknowledged in the purchaser's statement of adjustments at the time of completion.
Down payment: This is the topic of a conversation that you will be having with your mortgage lender. It’s the amount of money from your own resources that will be going towards the purchase price, the balance being the mortgage amount. The source of these funds is varied; cash, savings, investments, gifts, equity in other real estate etc. The amount of the down payment is again part of the conversation with your lender. It is determined by a number of factors such as your income, credit history, purpose of the purchase (principle residence or investment property), type of mortgage (insured or conventional) etc. Your down payment has to be evidenced to the lender prior to your approval but isn’t required until shortly before the date of completion.
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