by Jeff
23. August 2011
Vendor financing is when a seller or finance owner of a property decides to pay a part or in full the amount of the property and loans or takes over the mortgage for the buyer. The seller in turn offers the property as “rental” providing a quick solution to a first home buyer’s housing needs. This is how vendor financing helps first time home buyers through easy terms and a contract to secure them for the period that they try to establish a credit history in preparation for a mortgage for home purchase. This process is usually paired up with rent to own properties as these programs provide a good avenue for buyers to choose their desired house and seller to have prospective buyers for their property.
Of course, any prospective buyer has their needs and tastes and depending on what the seller has to offer these guys want something that would make the most out of their budget. Repayments play an important role in every deal whether it is a rent to buy or the usual renting, repayments determine the ability of the tenant/buyer to pay and if it’s a bit too high for their budget then chances are they’ll be looking elsewhere. Vendor finance makes it possible for these guys to have a chance at lower repayments for a longer contract or until such time that they can afford a mortgage to buy off the property.
Another thing to look at would be the down payment requirement. While it’s true that vendor financed properties may not require any deposit, looking at the practical side though a deposit is used for security of the seller and even as an advance collateral for financing the property for you. But the true beauty of it is the percentage of your deposit that gets applied to the principal price of the property upon purchase giving you a headroom for a couple hundred dollars. Same goes for the repayments that you pay during the duration of the contract, a fixed percentage of it gets applied to your purchase of the property giving you a substantial reduction once you’re ready to buy the property.
Now, with all that said vendor finance not only caters for the first home buyer but also to bankrupts or people with bad credit history and simply want to start over clean and getting back on track. The challenge for these guys is that they cannot afford a mortgage or loan from a bank because of their credit rating and vendor finance can help through affordable and cost effective repayments and a low down payment/start up cost. The beauty of it is that these guys are treated just like any new buyer or customer, they’re not discriminated for their past financial mistakes.
Understanding how vendor financing helps first time home buyers is the key to starting clean or starting anew without necessarily spending a fortune or at least buying off time while you save yet having the luxury of your own home now.