What is a deposit?

Definition of Deposit

A deposit, otherwise known as earnest money, is money that is used as collateral by the buyer when an offer to purchase property is made. This money is used as assurance or as a guarantee that the buyer will fulfil all contractual obligations, in particular, to purchase the property by a specified date for a specified sum.

Why is this term important?

Deposits are used for more significant purchases that would require a loan and a repayment plan, such as buying a house.

Deposits are typically a small percentage of the overall purchase price, such as 5% or 10% of the agreed-upon sale price. Deposits are part of the down payment that the buyer uses to purchase a property, but the deposit is paid upfront, at the time the contract is signed while down payments are paid on the official closing date of the contractual sale.

Deposits may also be used in rentals, where a renter will put a deposit down on a rental unit in order to secure the right to lease the unit.

Deposits may be refundable depending on the original agreement that was discussed between the seller and buyer. However, deposits are not automatically refundable. This should be a serious consideration when making a deposit offer, as you could lose this money should the deal fall through.

When in a multiple offer situation, a larger deposit can help differentiate you from the rest of the competition. A larger deposit can signal to a seller that you are financially well-positioned to purchase the property and that you are very serious about your offer.

Examples of term

When making an offer on a property, you may offer a deposit that is equivalent to 5% or 10% of the purchase price.  This deposit essentially holds the property, while you verify the information required to finalize the sale. Just remember, not all deposits are refundable.