How do banks view using vendor finance as the deposit?

Hi,

My grandfather is moving into a nursing home and since the house is out of my price range I was thinking of asking if I could purchase it via vendor finance say 26% payable in 5 or 7 years. I am however curious how the banks deal with vendor finance and what their views are on it.

Thanks,
Pablo.
 
Hi Pablo,

I tried to go there once, but the deal fell in a heap, because the bank would not except it.

I believe most banks frown upon it, and I think in this climate, it will be difficult. I only tried the once though, so who knows.:)

Regards Jo
 
Why Vendor finance? if the property belongs to your grandfather why not discuss moving the property into a trust via a living will. You get to live in it, and when there is a estate event the property or a least the agreed value would be transfered to you name.
 
There are one or two lenders in the non-conforming sector that will do it (last time I did this for a client was 12 months ago, my info could be out of date). They will want the vendor to take a second mortgage over the property.

There's no chance that the residential sections of the more mainstream lenders will take this on.

You may also have trouble with the exit strategy if the property doesn't go up in value (depends on what you negotiate).
 
There are one or two lenders in the non-conforming sector that will do it (last time I did this for a client was 12 months ago, my info could be out of date). They will want the vendor to take a second mortgage over the property.

There's no chance that the residential sections of the more mainstream lenders will take this on.

You may also have trouble with the exit strategy if the property doesn't go up in value (depends on what you negotiate).
Thanks Peter,

So these lenders would be happy with me putting no money into the deal?
 
As previously mentioned, my info is a bit old and may not be applicable these days.

Last time I checked you needed to put in the purchase costs (stamp duties, application fees, etc). The lender would only fund 70% under these conditions but would allow the vendor to leave in the other 30%. A strong asset base elsewhere doesn't hurt either.
 
Vendor finance is between the vendor and the purchaser. The deal you negotiate with the banks is based on contract price and has nothing to do with what personal loans people take out to make a purchase happen!
 
Vendor finance is between the vendor and the purchaser. The deal you negotiate with the banks is based on contract price and has nothing to do with what personal loans people take out to make a purchase happen!
Xenia,

The problem comes in as there will be 2 mortgagees - the vendor and the bank. Both want to make sure that they have the property as security if the loan defaults - unless the crazy vendor is offering an unsecured loan!

Cheers,

The Y-man
 
Hiya Xenia

There is a material credit risk difference between someone putting in hurt money of 20 %, vs hurt money of 0 %.

Thats one of the reasons the majority lender wont like a vendor finance situation for most residential.

ta
rolf
 
I agree with Rolf the market has changed dramatically for the 1 off Vendor Finance deal.

We have a separate VF Company and it is run as a business so treated differently by the lenders we use. Their attitude is that they they fund a development for say 12 months but then loose the interest income so why not get a 2nd bite of the cherry and fund the purchaser for the next 25 years who is buying the property from us.

Very much in the presentation and the benefit for the lender.
 
Does it have to be a formal vendor finance registered as a second mortgage? You could present the 25% as a gift, and then have an arrangement with pops, or the likely benificiaries of the will to repay the money at some future point. It really depends on how many and how accomodating the other benificiaries are, and how you sell it to them, ie they are probably looking at a lesser inheritance if the property is liquidated now and sat in a term deposit for 5 years, instead of still having a share of the capital growth of the property ( in the form of the 25% vendor finance portion) later on...
 
Hiya

Silly me

I didnt read the full post.

Id say you can buy the place as a favourable purchase.

This will allow you to borrow the 80 % or so you need.

The lender may not like a second mortgage behind the first on that basis though

ta
rolf
 
The idea of a gift is an interesting one, but I can see a few potential problems.

The first one would be that the lender would want the vendor to state that the 25% actually is a gift, by way of a statutory declaration. If a vendor signed this, they may loose any legal recourse to get their 25% at a future date.

The second problem would be the relationship with the vendor. Vendors who have a family relationship with you would be acceptable, but if it's an unrelated person they'll want to investigate further why this person would simply give you 25% of their property value.

In most cases the lender would probably conclude that it's not a legitimate gift or that the real value of the property is 25% less than what you're actually paying for it.
 
OK, so vendor finance may not be the best way to go.

I would not be one of the beneficiaries and want to keep everything legal and out in the open to stop any family squabbles in the future.

What do you think if I was to buy 50% now and put an option on the other 50% to purchase it within 10 years at the current market value (or slightly above). I was also thinking of asking for the rights to rent it out and for me to get 100% of the rent providing that I pay all the expenses. This way it should be neutrally geared for me.

This of course would only be OK if it didn't effect my grandfathers pension etc. adversely.

So do you think it would work?
 
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