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25 September 2015With recent changes in lenders policies in relation to above 80% lending it’s important to think outside the square and look at ways in which purchasers are able to buy a home if they don’t have a full cash deposit of 20%. One of the ways to do this is Vendor Finance.
Vendor finance is where the Vendor (owner or seller) leaves some money in to be paid off over a period of time. Eg if purchase price is $250,000 and the Purchaser has $25,000 the Vendor may leave in $25,000 as a loan to be paid off in instalments over a period of time typically 2 – 5 years). The Purchaser gets loan approval from a lender for $200,000 (ie 80% of the purchase price), puts in their cash contribution of $25,000 and the Vendor finance of $25,000 means that there is sufficient funds for settlement of the purchase.
The advantage of this is that the purchase can indeed happen while fitting in with the strict lending criteria. However there are substantial disadvantages in this type of approach which are as follows:
Lenders are keen to attract new home purchasers and Vendor Finance is one way they may be able to do that. But until the waters are tested it’s not known if banks will have an appetite for this type of lending. Other non-bank lenders have indicated that they do so it will be interesting to see if this becomes common practice.
It is imperative that if you were to consider a transaction using Vendor finance that it be done right. If you fail to present a proposal like this in the right way then the loan is likely to be declined and the opportunity lost. It is for this reason that we would recommend a mortgage adviser be used to guide you with your particular situation and how this can work to ensure that you have the best possible chance in getting this across the line.
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