Navigating the financial landscape of home buying and selling can be complex for your clients. Unlike grocery shopping, real estate doesn’t come with a barcode you can scan at checkout.

When assisting clients seeking a mortgage, clarifying the concepts of down payments and deposits is essential. While they may seem interchangeable, they serve different purposes in the home-buying process.  

In this article, we’ll break down these terms and their implications for homeownership, helping you to better inform your clients, whether they are first-time buyers or looking to refine their strategies. 

Understanding down payments 

A down payment is the amount of money a buyer must provide upfront, separate from the mortgage loan. Common sources for down payments include: 

• Personal savings 
• Investment returns 
• Gifts from family members*
• Borrowed funds** 

*Note: If a client intends to use gifted funds for their down payment, they will need a gift letter from the donor. These funds must be deposited into the buyer’s account before being applied as a deposit or down payment. Inherited funds have different stipulations that depend on the lender’s policies. 

**Note: Some lenders may allow clients to borrow against personal lines of credit or other properties for their down payment. 

Guiding clients on down payment amounts  

In Canada, the standard requirement for a down payment is typically 20 per cent of the home's purchase price. However, insured mortgages permit down payments as low as 5 per cent. While the minimum down payment is 5 per cent, lenders often expect an additional 1.5 per cent to cover legal fees and other associated costs, including: 

• Appraisal fees
• Home inspection fees
• Title insurance 

Explaining the need for a deposit 

When your clients are ready to make an offer, it's crucial to clarify that a deposit is not the same as a down payment. A deposit serves as a security measure for the seller, demonstrating that the buyer is committed to the purchase. It also protects the seller against potential financial loss if the buyer fails to complete the transaction. Essentially, a deposit signals the seriousness of the buyer's offer. 

How deposits affect down payments 

Deposits do contribute to the overall down payment, but lenders will require documentation tracking the origin of these funds over a 90-day period. For instance, lenders will typically ask for bank statements covering 90 days from the account holding the deposit. They will need to see records indicating the deposit's departure from the buyer’s account and its receipt by the selling brokerage. 

The process of applying a deposit toward a down payment 

During the transaction's conveyancing process, the lawyer will request the deposit from the seller’s brokerage. This deposit will then become part of the total purchase funds. 

To illustrate the distinctions between down payments and deposits, let’s review a couple of scenarios. 

Scenario 1: Ideal Camille 

Imagine Ideal Camille, who, with the assistance of her REALTOR^®, finds a home listed at $400,000. For a 20 per cent down payment, Camille has saved $80,000 for which she can provide her lender with a 90-day transaction history. She is pre-approved for a mortgage to finance the remainder of the purchase. 

To strengthen her offer, Camille and her REALTOR^® include a $20,000 deposit. Once the seller accepts the offer, Camille delivers the deposit to the seller’s brokerage and receives a Receipt of Funds, she then provides her lender with confirmation that the deposit has been received by the listing brokerage. This ensures the lender recognizes that $20,000 will be applied to her $80,000 down payment. 

Scenario 2: Gift Cliff 

Not every transaction is as straightforward as Ideal Camille’s. Take Gift Cliff, who is eager to purchase a $300,000 home. He receives a $15,000 down payment gift from his father, which is only 5 per cent of the purchase price, necessitating an insured mortgage. Excited about the home, Cliff instructs his REALTOR^® to include the entire $15,000 as a deposit in his offer. 

Once his offer is accepted, the $15,000 deposit is sent to the selling brokerage. Cliff must inform his lender that his down payment will come from this deposit and advise that the deposit was received by the listing brokerage. He also communicates to his lender that the deposit was a gift from his father, prompting the lender to request a gift letter and outline the necessary details for the letter.  

Pro tips for REALTORS^® to share with clients 

Discuss gifted or borrowed funds: If any part of a client’s deposit or down payment is gifted or borrowed, advise them to consult with their mortgage broker about lender requirements. Some lenders allow gifts from a wider range of individuals, while others limit it to immediate family members. 

Emphasize documentation: Lenders are increasingly strict about tracing the sources of funds for down payments. Clients should be prepared to provide at least 90 days of financial history for all funds utilized for their deposit and down payment. 

Advise on account management: During the purchasing process, advise clients against transferring large sums in and out of the account designated for their down payment. Any substantial transfers will require thorough documentation explaining the sources and destinations of those funds. Given Canada’s strict anti-money laundering regulations, maintaining a clear transaction history is crucial. A best practice is to keep the down payment in a dedicated account used solely for the home purchase. 

More Lending Resources Available

Whether you’re interested in learning more about unique financing solutions, how to make financing easier or avoid mortgage nightmares, check out the CREB^® Webinar Library to improve your mortgage how-to!