An Overview of Vendor Financing
Vendor financing is a novel approach to financing for homebuyers. If you have been turned down for a home loan by a bank, you might still be able to purchase your dream home by using vendor financing. This guide provides an overview of all that you need to know about vendor financing.
Vendor Financing Explained
Vendor finance is also known as seller finance or owner finance. This type of loan is similar to layby for retail items: the borrower-purchaser pays instalments to the purchaser and sidesteps the lender. A deposit is paid by the borrower-purchaser to the vendor.
The terms and conditions might allow the borrower to delay paying interest for a period of time, or the borrower might have to pay interest on the loan from the first repayment. Vendor financing has a long history in Australia, having been in use for more than a century.
Why Should Purchasers Use Vendor Finance?
Vendor financing is often used as a stepping stone to a traditional home loan from a bank. After a certain period of time – which could be anywhere from 6 months to 10 years or longer – the purchaser is required to transition into a home loan. Similar types of loans called acquisition finance are available for purchasers of businesses.
The benefits for the purchaser are obvious. They can enter the property market and purchase the property they want without the delay associated with not being able to secure a traditional home loan.
Purchasers who do not have a sufficient deposit or otherwise do not meet the standard lending criteria for home loans can buy a house sooner rather than later with vendor financing. Often the purchaser does not have genuine savings or a solid credit history. They might be self-employed or simply do not meet the other lending criteria of their lender.
While the borrower is still required to pay a deposit, it’s usually less than those associated with home loans. The deposit may be as low as 3-5%, but this will depend on the vendor’s terms and conditions.
Unlike a traditional layby arrangement for retail goods, vendor financing gives borrowers access to the house immediately. The purchaser can make improvements to the home (subject to the vendor’s agreement) and retain the value of any improvements.
Why Should Vendors Offer Vendor Finance?
For the vendor, the benefits include possibly obtaining a better price than they otherwise could. By offering vendor financing, the vendor might be able to attract a purchase willing to pay more for the property.
In addition, they can earn interest from the loan and receive an ongoing income from the property. A property that comes with the option of vendor financing could sell more quickly than one that does not. As such, offering vendor financing can be a good idea if the vendor finds that they cannot meet their ongoing mortgage repayments and has to sell the house quickly.
As vendor financing eliminates the role of the lender and others such as real estate agents, it can lower overall transaction costs for both the buyer and seller.