Anyone who wants to buy a house must first obtain enough money to satisfy the specific deposit and down payment requirements of a particular unit.
What is a Deposit?
Real estate deposits are signifiers of serious intent to purchase. There will be a lot of people inquiring about properties, but most of them don’t really have any intention of buying. If you want to get the seller’s attention, then offer to make a deposit. This generally amounts to about five percent of the price, but it can be higher if there are several competitors for the same piece of property.
The contract will include the amount given as deposit for the purchase of the real estate, as this is part of the total price. Usually, this contract will become firm a week after the acceptance of the offer. A bank draft of this amount will have to be given to the realtor. This will be held in trust at the real estate brokerage until such time that the papers have been ironed out and the transfer of possession has been completed.
As such, sellers don’t actually get their hands on the real estate deposit until late in the game when the house is formally sold. They care a great deal about this because it serves as protection in the rare cases where the purchase contract suddenly gets terminated. They might keep the money if it was the buyer who was at fault. This can happen if the buyer was not able to fulfill all the obligations stated in the contract. Disputes regarding the right to the deposit may have to be settled through mediation.
What is a Down Payment?
Since homes are so expensive, most people will not be able to afford to buy them in cash. The vast majority will need to get some financing assistance such as a mortgage loan. Now lenders will not cover the entire cost of properties. Buyers will have to partially pay with their own money as proof of their ability and commitment to make the purchase. This is called the down payment. A typical amount is 20% of the purchase price, but it can go as low as 5% in some cases or much higher if the funds allow it. If a buyer has the money to spend, then a good goal would be to reduce the loan amount as much as possible. This would lower the interest payments down the line. Down payments that are less than 20% are generally accompanied by additional mortgage insurance payments, so people stick to the convention. Note that down payments will not have to be paid until the new home has been finished.
The ideal source of the funds is your own personal bank account. It should be cash that is already on-hand, not money that has been loaned from elsewhere. Often, parents will support their children by giving funds for their house down payment. There needs to be a formal letter from them specifying that this is a gift and not a loan to be repaid. Banks frown upon borrowers who pile loans on top of each other as this practice reduces their reliability to pay back the money they owe.
It is possible for those who have never bought a house before to utilize their RRSP savings to complete their downpayment. This can be as much as $20,000 for an individual or $40,000 for a couple. Repayment must be finished within fifteen years. The downside is that this halts the tax-sheltered growth for the RRSP. If you have reservations, then discuss your options with your financial manager. You can only avail of this method if your offer has been accepted by the seller. The funds must also be within your account for a minimum of 90 days.
The best way to get enough money for a down payment is to take the slow and steady approach. Try to minimize your expenses so that you can live within your means. Cut out unnecessary spending and seek cheaper alternatives for the things you can’t do without. You should be able to save a bit of money month after month. After a while, you will have enough cash stashed in the bank to fund this crucial step towards home ownership.
Hi, I’m Zack from Deposit Financing. I wrote this post for this real estate blog. At Deposit Financing, we go all over real estate and bridge financing, check out our blog for more articles like this. And as always, thank you for reading!