Mar 15

Advantages & Disadvantages to Vendor Financed Homes

Vendor financing is a strategy that involves the home seller accepting payment directly from the buyer instead of using a bank or mortgage lender to finance the purchase. This strategy may be appropriate for a seller when demand for housing is low, and for a buyer who may have difficulty obtaining traditional financing. Vendor financing can have advantages and disadvantages for both buyers and sellers.

Advantages for Sellers

Offering Vendor financing can benefit sellers by increasing the pool of available buyers to include those who do not qualify for bank loan, thereby improving the chances of a home sale. Because there is no lengthy financing approval process, a seller may be able to sell the home quickly. Vendor financing also allows the seller to determine the interest rate, which gives the seller control over his return on the investment.

Advantages for Buyers

Finding an Vendor financed home can benefit buyers by eliminating the need for traditional mortgage qualification — this can be particularly advantageous for buyers who have suffered past credit problems. The seller may also cover closing costs, which can reduce the amount a buyer needs for a down payment.

Disadvantages for Sellers

Unlike in a traditional real estate transaction, the seller’s money remains tied up in the home until the buyer pays off the loan. Because the seller gives a loan for the purchase, she is stuck with the home if the buyer defaults on payments. Also, offering Vendor financing may primarily attract buyers with poor credit histories, which may increase the risk of default or the length of the contract.

Disadvantages for Buyers

In a Vendor financing transaction, the seller does not usually report payments to credit bureaus, so the buyer typically will not be able to build or rebuild his credit history by making timely payments to the seller. If the seller still owes money on her mortgage, the lender may enforce a “due on sale” clause and require the seller to pay her entire mortgage immediately if they default. Also, because the seller is free to set thier own terms, the buyer may pay a larger down payment and a higher interest rate than a traditional buyer.