There
are many cases where people do not have enough money to purchase property without
a bank loan and have to seek the help of someone who can finance them into a
home purchase. Vendor Finance (also known as seller finance) is an agreement
between the owner of a property and the buyer whereby the owner of the property
offers finance to the buyer. Vendor Finance is generally sought by people who
have problems in getting finance through financial institutions. There may be
various reasons due to which the application for loan would have been rejected
by financial institutions and in many cases it does not matter to the vendor financier.
In such cases vendor finance is helpful as they seek the help of vendors to
finance them with the help of a vendor finance agreement.
How Vendor Finance Works
Vendor
Finance takes place when the vendor (usually, but not always the owner of the
property) offers finance to the buyer. They help buyers realise the dream of
home ownership by enabling them enter in to agreement for a property purchase by
helping them into a loan. Vendors can lend up to 80% of the purchase price to
the buyers and in some cases can lend up to 100% of the property value.
In the case
of Vendor Finance, vendors charge interest at a higher rate than the market interest
rate which is a standard practice in the finance industry. The buyer makes the
payment to the vendor and whatever is in excess, would be the vendor’s income.
In many cases the vendor would seek an initial advance payment or initial deposit
from the buyer to secure their interest in the property which in many cases be
as low as $5,000.
Repayments in Vendor Finance
Vendor finance
repayments are usually higher than a normal bank loan. This is due to the
higher risk which the vendors associate themselves with. The buyer usually pays
interest at maybe 1% more than the market rate to the vendor. The property remains
in the hands of the vendor only unless and until the buyer pays off the entire
amount to the vendor or the buyer refinances with another financial institution
(this is more common and in many cases, encouraged). Legal title remains with
the vendor whereas the buyer receives equitable title.
In all
cases the buyer and vendor agree to certain terms and conditions before entering
into an agreement. It is better to consider all the pros and cons including the
conditions of what would happen in the case of late payment or default of
payment. In a case where the buyer is not able to repay on time due to some
problems then the vendor can terminate the contract. In such cases, the buyer
does not get their money which has been paid to the vendor. The vendor may
place the property with another buyer.
It is imperative
that you understand fully the agreement before entering in to Vendor Finance or Vendor Finance Agreement. Vendor
Finance is legal and one of the easy options available to buyers finding
difficulty in getting finance through other institutions.