What Happens to Your Deposit When You Buy a Home?

Why are deposits such an integral part of real estate transactions?

As a way to show sellers that you're serious about buying their home, you'll typically be required to submit a deposit along with your offer. Depending on the market, the deposit can either be provided a day after the offer has been accepted, or it can be provided to the seller along with the actual offer. 

Usually, the deposit is handed in along with the offer in a hot seller's market, especially if there's a bidding war taking place. Having a certified cheque in hand with the offer just makes your offer stronger and more compelling. But technically, deposits can be provided in the form of a money order or certified cheque 24 hours after the seller accepts your offer. 

Deposits are integral components of real estate transactions and show sellers that you're qualified to buy the home. They also show that you're making a gesture of good faith and you're willing and able to go through with the transaction until closing.

How Much Should Your Deposit Be?

There really is no hard-fast rule about the exact amount that buyers should put down as a deposit. Usually, the going rate will depend on the type of market you're in, how much you're paying for the home, and where exactly you're buying the property. 

In Toronto, deposits are usually around the 5% mark of the purchase price of the home. In outer suburbs and rural areas, the deposit can be as low as 1% or 2%. In really remote areas, the amount can be just a few hundred bucks. But as a general rule of thumb, deposits should be somewhere in the 5% range of the purchase price of the home in order to be considered competitive. 

Buyers shouldn't have to worry about their deposits, because the amount they submit as a deposit is part of the full down payment amount. No matter how much of a down payment you were planning to put down, the deposit will go towards it. You'll have to come up with the down payment funds shortly after the offer has been accepted anyway, so having the funds available for the deposit should be anticipated and prepared for.

What if the Deposit is Handed in Late?

Technically, the seller has the right to kill the deal. Time is of the essence in a real estate deal. That's why there are expiry dates all over these contracts. Even a matter of minutes can cause a deal to fall through. As such, it's always best if buyers are prepared to hand in the funds needed to cover their deposit check no later than 24 hours after the offer was accepted. 

If you think you'll need more time to come up with the deposit money, this fact should be stated in your offer. 

Who Keeps the Deposit Money?

Deposits checks are never kept in the hands of the actual seller. Instead, the money is kept with the seller's real estate brokerage representing them. It's kept safe in a trust account and may even be protected by insurance in case the brokerage ever files for bankruptcy. That way, the buyer can recoup their funds if anything catastrophic like this ever happens. 

If the seller kept the funds, any number of nefarious things can happen. The seller can easily take the funds and disappear, or they even go bankrupt. In either one of these cases, your money can be gone for good.

Once escrow goes through and the deal is finalized, the funds are released to the bank and put towards your down payment and the entire purchase price of the home. 

In cases where the buyer is legally allowed to back out of the deal, the deposit funds can then be given back to the buyer. This can happen if the contingencies were unable to be met before their respective expiry dates. For example, if you placed clauses in your offer that made it conditional upon obtaining financing or upon a satisfactory home inspection report, you can get your deposit back if either one of these clauses is unable to be fulfilled.

Final Thoughts

Deposits are very important components of a real estate deal. In order for you to make a strong offer, your deposit amount should be high enough to get the seller's attention, aside from the actual offer price itself. 

Your deposit check should come in the form of a money order or certified check, and should ideally be submitted along with your offer in order to strengthen it. To make the most of your deposit, be sure to heed the advice of your real estate agent.