Down Payment For A House
In my years as a real estate professional in Steinbach and much of SouthEastern Manitoba, I’ve helped many people navigate the myriad of confusing things that come up while shopping for their next home.
One of the most common questions is, “What’s the difference between a deposit and a down payment?”
Allow me to help clear that up.
What is a Deposit (and Why should I Make One?)
A deposit is money that accompanies the Offer to Purchase. Basically, it’s trust money, the point of which is to show that you are serious about offering to buy the house, and can be trusted not to waste the seller’s time or somehow torpedo their efforts to sell their house to others. Your money says you will not change your mind and, if you do, you’re willing to compensate them for their wasted time.
What Happens to the Deposit If Your Offer is NOT Accepted?
Nothing. The cheque will not be cashed. It will be returned to you.
What Happens to the Deposit If Your Offer IS Accepted?
If your offer to purchase is accepted, the Cheque will be deposited into the listing broker’s trust account. Later, when the deal goes through and the purchase becomes official, the funds are forwarded to the lawyer’s office and distributed toward the purchase price according to standard practice.
TIP: Bigger deposits give you an advantage. The bigger your deposit, the more seriously the Seller will take you and your offer.
What happens if they deposit our check and then we can’t meet the conditions on the offer? (What if we don’t get financing? What if the home inspection fails? What if…?)
We will fill out a simple form requesting the deposit to be released and the funds will be returned to you.
What is a Down Payment?
The down payment is what your lender will require of you before approving your mortgage. This is between you and the lender and does not involve the real estate agent or seller.
For a traditional mortgage you will need 5% of the sale price for a down payment.
When arranging your down payment, if you can manage to put down 20% of the purchase price (or more), you will avoid the cost of paying an insurer like CMHC or Genworth.
If you do not have sufficient down payment available and you have a steady job, stable income, and a good credit rating, I can hook you up with a mobile specialist who has different products available and you may possibly be eligible to buy without a full down payment.
There are LOADS of other questions that crop up in real estate.
Good news – I have some awesome resources to set you up for a successful and pleasant buying experience.
Check out my HomeBuyer’s Information Package HERE
Do you ever think you’ll never be able to buy a house?
You’re not alone.
Raising the down payment is the most difficult part for the first time home buyer. Climbing house prices only make the joy of home ownership seem even more impossible. With the average house price in Manitoba hovering around $250,000, a 5% down payment of $12,500 can feel unattainable.
Some are lucky enough to have the down payment gifted to them by family, though it robs them of the joy of accomplishing it on their own, and they never develop the financial skills it takes to earn it. (… so I’m not sure how lucky they really are)
For most though, the down payment must be worked for. And it’s tough. (That’s why there are so many rentals!)
If you’re one of the many who struggle with even believing the joy of home ownership is possible for you, I have some good news.
These three little-known secrets will propel you toward that down payment faster than you though possible. Ready?
Pay your bills on time.
It doesn’t sound like much, but paying bills is not a private matter. Late payments and arrears affect your credit rating. The bank who will one day fund your home purchase will look at your bill payment history to see if you’re able to pay on time every time. If you are, they are much more likely to give you a mortgage – another bill to pay – and trust you to pay it back.
It might sound weird, but it takes money to borrow money. In decades past, a person without debt was seen as a wise financial steward. That is no longer the case. These days, a person who has never borrowed money looks to be incapable of managing debt, so why would anyone lend to them? It’s one of those chicken-egg conundrums. You can’t borrow if you don’t have debt, and you can’t have debt without borrowing.
The solution? Borrow small amounts of money – secured loans and credit cards are available – and then demonstrate your financial savvy by paying it off on time every time.
For the uninitiated, a secured loan would look like the bank using your car as collateral, or a credit card company keeping $500 of your cash in exchange for a $500 credit line. In that case, you’re essentially buying credit. Not to worry though, they return your cash once you’ve demonstrated you are trustworthy.
Save, But Just a Little.
Everyone knows a down payment needs to be saved up. But it doesn’t necessarily have to look like rice and beans sacrificial living, or getting a fourth job. (Though if you can hack that, power to you!)
For most, it’s unrealistic to expect that of ourselves. That’s why I’m a big fan of saving small. And there are a bunch of ways to do it.
Every time you break a dollar bill, keep the change in a jar. When the jar’s full, deposit it all in a separate down payment savings account.
Dedicate certain side income to your down payment fund. Garage sale proceeds, selling produce from your garden, overtime, tips, whatever extra you can skim off without really noticing, do it.
You can also skim on a schedule, having 5% of each check automatically deposited into your trusty savings account. Quick math: 5% of $40,000/year net earnings = $2000/year from that one effort alone.
Scotia Bank’s Bank The Rest® Program
If you are a Scotia Bank member, you have another option. In effort to help Canadians save more, they launched the Bank The Rest® savings program. This allows you to round up your purchases to the next multiple of $1 or $5 as you decide, and the difference is automatically transferred to your savings account.
You know how the interest on an overdue bill can add up quickly? If you combine all of these elements, the money starts adding up just as fast. We’re talking thousands of dollars in your account every year.
Before too long, you’ll be well on your way to a healthy down payment. As a bonus, along the way you will have increased your credit rating, and developed some killer financial skills that your peers will envy.
Yes, I know it will take time.
But how much more time will it take if you wait to start?
Yes, I know it will take work.
But let me ask you something: What worthwhile thing have you ever had that didn’t require work?
You must gain control over your money or the lack of it will forever control you.
Real estate agents facilitate millions of dollars in transactions each year.
And we get a cut from each one.
…So we must be rich, right?
By that logic, car salespeople, furniture sales staff, and the Tupperware lady must all be raking it in with the value of sales they make. After all, they broker thousands of dollars in sales – tens of thousands even – and get a cut from each sale! They must be rich.
But, they’re not.
I’m afraid we real estate agents are about as rich as anyone else in any other industry who earns a commission.
For some reason though, people continue to assume real estate agents are rich, and should give up their over-stuffed commission to benefit the little guy. (Which is apparently everyone else.) It’s bizarre. In no other industry I’ve worked, have I been asked to forego my earnings (translation: the deserved paycheck I worked hard for!) just because. But it happens in this industry – sometimes as casually as one says hello.
I recently received an email from a complete stranger, who immediately asked a favor. “I’m interested in one of your properties… can you help me with the down payment?” To clarify, this person was asking that I “help” by giving up my commission. This person I’ve never met was asking me to forfeit my paycheck. (Has anyone asked for YOUR paycheck after you put in the time?)
It’s a big ask, even for a family member who loves you dearly. To ask it of a complete stranger is beyond a favor. It’s downright offensive.
If you, like this person, assume real estate agents are too rich and just a bunch of greedy hoarders who for no reason at all owe you a living, then I guess you wouldn’t understand how such a request could be remotely offensive.
If you work hard for what you have though, and a stranger walked up to you and required your thousands of dollars just because they wanted it… I seriously doubt you would smile and fork it over just to be “nice”.
Well, reading that email did not inspire any nice thoughts. I imagined all kinds of things I could say to “educate” the person who sent it. But I know better than to open my mouth when I’m upset. Once I cooled down, I thought back to the days before I owned a house.
Saving up the down payment is about the most difficult part of buying your first home. It takes diligence, discipline, and a whole lot of work and time.
It’s hard. I get it. Been there.
That’s why I’ll write about how to build up that down payment in a future post.
Today, I just wanted to highlight once again that real estate agents are not some uber-wealthy race of robots whose earnings belong to the human collective.
We are your average working Joe.
We are your average mortgage holder.
We are you.