Vendor finance is an alternative to borrowing from a bank or other lender, but is it right for you?
Also known as seller finance, vendor finance is a way to get your foot on the property ladder without the need to secure finance from a bank or other lender.
Vendor finance can work similarly to a mortgage, in that you’ll typically need to pay a deposit and then make regular repayments. However instead of paying your loan back to the lender, you pay it to the seller, skipping over the middle man (lender!).
Depending on what you’ve agreed with the seller, your repayments may or may not include interest. Generally the purchase price or repayments are slightly higher though to provide some benefit to the seller given they don’t receive the lump sum payment for the property at settlement like they normally would through a traditional lender sale.
Vendor finance may be used by some buyers as a way to improve their borrowing capacity so they get into a better position to secure a home loan. Depending on your credit history, employment, assets and other liabilities, these regular payments to the seller might allow you to build up a track record of payments to help you qualify for a mortgage, which also means the seller only needs to provide finance for a shorter agreed period of time.
There are different kinds of vendor finance, including rent to buy schemes, but they certainly aren’t for every buyer and definitely not every seller.
Some experts warn against it, however if the vendor is willing it becomes another way to enter the property market without having to go through traditional lenders for finance.
Before entering into this type of scheme it’s important to seek professional financial and legal advice.
Have you ever used vendor finance to buy a property? Share your experience with us in the comments below.
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