Today’s housing market is hot. Offers are competitive and buyers need to be ready to act swiftly when they find a home they want to buy. If you are in the market for a new home, it’s best to have your finances sorted out before you start the process. This will give you realistic expectations when you start your journey.
A deposit is the money you pay with a firm agreement of purchase and sale of a home. This deposit is part of your down payment and therefore part of the overall purchase price of the property. A deposit assures the seller that the buyer is committed to the agreement.
The housing market has changed considerably in the past decade. Not only have prices been going up but financing options have also changed. It used to be possible to obtain 100% financing for a mortgage, meaning zero money required for a down payment. Those rules have changed and Canadians need to have at least 5% saved to qualify for a mortgage.
For first time homebuyers, this can seem like an insurmountable challenge. Monthly expenses, including rent, can leave the bank account balance pretty low. Saving even 5% can seem impossible. There are options available to you.
A deposit for purchase loan will allow you to have the cash upfront to offer a deposit on your ideal home. This is the money you submit when you make an offer to buy the property. The amount of the deposit can be negotiated between you and the seller but a standard number is 5%. This deposit is part of your down payment but you’ll still need to contribute the remainder from your existing assets.
There are many reasons why a deposit for purchase loan might be right for you. However, you need to evaluate your financial situation and confirm you can afford the mortgage payment and the loan repayment each month.
The deposit is due once subjects are removed. You may have an accepted offer which is subject to financing or other elements. This would typically include a 7 day period to satisfy these subjects. If something falls through, for example, financing is not approved, you do not lose your deposit because you have not yet transferred the money. The deposit is only made after you are satisfied with your due diligence and the subjects are removed.
In the event of multiple offers, having your deposit in hand can be a negotiating tool. It shows the seller that you have available funds ready to go. This can be particularly important if you’re making a subject-free offer.
Once the deposit is made, the deal is firm. The deposit is usually held, in trust, by your (buyer) agent’s brokerage. This deposit will typically need to be in the form of a bank draft so it’s important to know exactly who it needs to be made out to. It is possible to use a certified cheque, you will just need to confirm the details when you are making your arrangements.
There are many factors to consider when entering into a major financial decision like buying a house. You’ll need to consider how much you can afford to spend and how much that translates into your monthly payments. There are a few things you can do to position yourself.
If you have credit card debt or personal loans, pay them off. Not only will it reflect a better credit score, it will put you in a better financial situation for repaying your mortgage and deposit loan.
The more you can save for a down payment, the better. A larger down payment will give you access to lower interest rates, saving you thousands of dollars. It may also help you avoid mortgage insurance, saving you further.
Look for a home that is well within your affordable range. It’s ok for your first home to be a starter home. There will always be an opportunity to upgrade in the future but owning your home – even a small home – is better than paying rent. You’re making an investment in your future.
In today’s competitive market, a sizable deposit can be a make-or-break deciding factor for your offer. With multiple offers, a seller will consider many aspects and a deposit shows you are committed to the deal and have the finances to complete the transaction. A larger deposit of 5% – 10% can be particularly appealing and help your offer stand out. Keep in mind the deposit is applied to the down payment and included in the overall purchase price of your home.