Can I really buy without a bank?
Yes you can! If the seller of the house is happy to get paid over a period of time, and you can afford the repayments, then you don’t need a bank loan or mortgage to get started. Usually the seller will agree to do this for a certain period that will allow you time to be able to qualify for a loan and complete the purchase.
Depending on the type of contract, you may never need to get a loan, but usually you will be better off ‘refinancing’ when you can, as it will save you money in the long run.
So, while you may not need a bank to start with, the plan is usually that you will need a bank to finish.
What is Vendor Finance?
Vendor Finance, Seller Finance or Owner Finance, describes ways that the seller of a property (the Vendor) can help the buyer finance (pay for) a property purchase instead of, or in addition to, a lending institution (eg a bank). Sellers who use Vendor Finance don’t need to receive payment of the price for their property in one lump sum. Buyers will be able to afford the repayments but aren’t able to qualify for a bank loan at the start.
The seller does this by allowing the buyer to pay off the home over time, instead of the standard process of paying in one lump sum.
The terms of the sale/purchase are agreed upon by seller and buyer. They will usually consist of an agreed repayment amount and a time period for payments to be completed. All vendor finance agreements are Contracts For Sale or Loan Agreement documents which comply with the law.
Is it legal?
Yes! Buying and selling property using vendor finance terms is governed by Conveyancing and Property Laws, and by the National Credit Code.
Vendor finance has been used for as long as houses have been sold. Because it is not the “mainstream” way to buy or sell homes, it does not receive as much marketing hype as real estate agent listings and bank loans.
In recent years it has become a very popular alternative to real estate agents and lending institutions. Because the law varies from state to state, you should familiarise yourself with what is legal in your area. Best to speak to a conveyancing lawyer that understands Vendor Finance!
What is Rent to Buy?
Rent To Buy, Rent To Own, Lease Option all refer to the same thing. If you are buying a home this way, you will be effectively given the opportunity to “Try Before You Buy“.
Buying a Rent to Buy home means you will be able to buy at the same time as you are renting.
Rent to Buy suits anyone who can afford to buy, but can’t get a loan for lack of deposit or for credit default reasons. When you buy a house without a bank loan this way, you pay rent and live in the house as if you were a regular tenant, except that this arrangement goes for an agreed period. At the end of that period, you obtain a bank loan and buy the house at a fixed price that you agreed on when you first moved in. The seller is legally obligated to sell you the house.
Within this time, part of the extra money over and above rent that you pay to the seller will build up your deposit. In this time you can clear your bad credit, and build up a savings history track record.
The price you eventually pay stays the same, even if the value of the house goes up, so you know exactly how much you need to borrow from the bank.
What is an Installment Contract?
An Instalment Contract is clever way to buy a house without a bank loan upfront. It is an agreement to purchase a property where the whole price is paid by instalments. It is not much different to how you would buy a TV or a sofa using credit, although the paperwork is more detailed. You are required to pay a small deposit upfront, and make regular repayments that include an interest component that is agreed upon with the seller.
You may agree on a time within which you need to complete the purchase, often by taking out a mortgage
The Contract is governed by the National Credit Code.
What is an Handyman Special?
Some properties need renovating to make them more livable and to bring their value up. It could be painting, tiling, new carpets or polished floorboards, new fences, and even a new kitchen. Some sellers advertise “sweat equity” to indicate that they are prepared to credit an agreed list of renovations towards the deposit. This is a “Handyman Special”. The seller will determine what needs to be done, when it needs to be done, and the amount credited.
Can I buy a house without much of a deposit?
Yes, if the seller offers Deposit Finance. This is not a “No Banks” arrangement because you must be bank ready and have a loan approval for 80% or more of the price. If so, the seller who offers Deposit Finance will be prepared to top up some, and sometimes all of the deposit gap between the price to be paid and the bank loan.
Of course, you must find stamp duty and legal costs payable on top, out of your own pocket. You might also look at the Rent to Buy advertisements, because those house sales allow for the deposit to be paid over time, with a bank loan needed only when the deposit has been paid
Another strategy is called the Deposit Builder. In this case the seller will help you build up a deposit over time, so you can go to a bank later on to get finance. All the while you are also paying off the house directly to the seller. As such, when you do get bank finance, your loan will be smaller because you would have already paid off some of the amount.
Are there other ways to Buy Without A Bank?
Yes, there are many strategies and different ways you can buy. Most sellers who advertise on this site are happy to discuss your situation with you and to make it easy for you to buy their house. Ask the seller if they can be flexible and work out a suitable solution that is tailored to your particular situation.
Will I pay market value for my house if I Buy Without A Bank?
Possibly yes, possibly no, because no one knows what the market value for the house will be in the future when you actually finish paying for it! The price you agree on today is the price you will pay at the end of the term. Even if the property value goes up or down, the price you agree to pay is locked in.
There are many variables that need to be considered. Do your research and be sure the offer is not only fair and reasonable, but also realistic and achievable.
All anyone can do is agree upon the price at the start, and agree that the price will be fixed and not go up. Because all forms of vendor finance have repayments which reduce the price, then after a while the amount owing to the seller will be less than the price at the start.
How much up front money do I need to buy a house?
The up front money is what you need to pay up front to receive the key to the house. Sellers will usually indicate the amount needed. It could be a percentage of the price, or a fixed amount, but in any case it will be less than the standard deposit which is 10% or 20% of the price.
As a general rule, the more up front deposit you have, the easier it will be to buy a house using vendor finance, because it makes the terms easier to negotiate with the seller.
Do I need to have a clean Credit File to buy a home?
Minor credit blemishes such as overlooked telephone bills might be OK, but major credit blemishes such as unpaid court judgments and bankruptcies are usually too serious. You need to have a clean credit file when you borrow from a bank, and for some forms of vendor finance such as Instalment Sales and Deposit Finance.
For Rent to Buy, so long as you keep a clean credit file for a minimum of 2 years, and in some cases 5 years, you can use that time to clean your credit file.
When does the Property Title transfer to me?
The title to the property will transfer to you at the normal time, which is when you have made all of your payments. This time will be at the end of the agreed term of the vendor finance, or earlier if you, the buyer, re-finance (get a bank loan) to pay the balance owing on the house or sell the house.
If the seller goes bankrupt, do I lose everything?
No, but you will need to switch from making the payments to the seller, to making the payments to the seller’s bank.
The Bankruptcy Trustee will recognise what you have paid, and will allow you to continue the payments, as long as the paperwork has been set up correctly. The seller’s bank will want to see that you have registered a Caveat on to the title, and so long as you keep making your repayments, they will be happy to allow you to live in the house.
We strongly advise to use a solicitor that is familiar with this process. You can find Laywers that know about Vendor Finance here.