Vendor Finance

15 February 2017

With 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:

  1. The most obvious is cashflow.  The Vendor’s loan will in all likelihood be over a short term.  They may or may not charge interest and this may or may not be at market home loan rates.  This means that you are paying off the new mortgage plus what is basically a substantial personal loan.  It’s important to know the cashflow situation before even considering this option to assess if this is affordable.
  2. This approach can weaken your negotiation on the purchase price with the Vendor meaning you may be paying slightly more for the property.  It’s unlikely the Vendor would ask more than asking price but they may not be as negotiable as compared to cash offers or offers subject only to finance.(ie offers where they would receive all the sale price funds on settlement date).  It is important to note that when Vendor finance is being used the lender would request a registered valuation and the purchase price cannot be more than the registered valuation figure. 
  3. The option of Vendor Finance may not be available on the particular property that you are looking at and so you may not get the house you want.

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.

Published In Whakatane Beacon

This post was written by

Trish Marsden - who has written 96 posts

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