Vendor take-back mortgages are a solution for prospective home buyers who can’t afford a home through traditional means. Whether you’re unable to qualify for a mortgage or get a high enough mortgage, this financial option may help. Through this model, buyers can take out a loan for the whole or partial cost of the home.
Vendor take-back mortgages were popular in the 1980s and 1990s, allowing first-time home buyers to enter the market. Recently, their popularity has returned as affordable housing has become more unattainable in Canada due to rising housing prices and higher costs of living.
What Is A Vendor Take-Back Mortgage?
A vendor take-back mortgage (a.k.a. VTB mortgage or seller take-back mortgage) is when a seller helps the buyer finance the home by “lending” them money. They may help finance a portion of the home or the full purchase through a VTB mortgage.
Essentially, the seller allows the buyer to pay for the home in installments without having to get a mortgage. The buyer simply pays the seller until the house is paid off. Note, the seller will place a lien on the house until the house is paid off. Moreover, only sellers who own their home completely can offer a VTB mortgage.
Who Is A Vendor Take-Back Mortgage For?
A VTB mortgage is for buyers who are unable to qualify for a mortgage big enough to finance the house. This may be in due to poor credit history, an invisible credit history, or a low down payment.
Partially Funded VTB Mortgages For Buyers
Most vendor take-back mortgages are partially funded. This is when a bank only funds part of the mortgage and the seller funds the other portion of the mortgage. This can be useful for potential home buyers who have only been approved for a small mortgage amount from their bank.
For example, if the buyer qualifies for a $350,000 mortgage but the house costs $450,000. The seller can make up the difference by offering the buyer a VTB mortgage. When the house is sold to the buyer, the seller will receive the $350,000 from the bank and the other $100,000 will be paid in installments by the buyer. Since it’s being partially financed by the seller, the seller will put a secondary lien on the property.
Fully Funded VTB Mortgages For Buyers
A fully funded vendor take-back mortgage is when the seller fully finances the mortgage for the buyer. The buyer must then pay off the seller in installments as they would their bank.
This can be helpful for sellers who have had their property on the market for a long time and have been unsuccessful in selling it. First-time home buyers who have been denied a mortgage from a bank can also benefit from a fully funded vendor take-back mortgage.
In this case, the seller would register the VTB mortgage as a primary lien against the property. This is because there are no other lenders involved. The buyer will pay the seller the full cost of the home in installments. The lien will be removed once the buyer pays off the home.
What Are The Requirements For A Vendor Take-Back Mortgage?
The requirements for a vendor take-bank mortgage are simple.
- The seller must own the property.
- The buyer will need to meet any requirements set by the seller.
- In general, the buyer must require additional funding from the seller to afford the cost of purchasing the property.
Benefits Of A Vendor Take-Back Mortgage
- Get your dream home. Buyers can access their dream home that may be out of their budget by taking a loan from the seller.
- Sell your house. For a seller that has had their home sitting on the market for a long time, a vendor take-back mortgage may interest more potential homebuyers and make their property more competitive on the market.
- More flexibility. This process is more flexible compared to a loan from the bank, as the buyer and seller can negotiate the terms of the loan.
- Avoid mortgage default insurance. A buyer can avoid paying mortgage default insurance by borrowing enough for a 20% (or more) down payment from the seller.
Drawbacks Of A Vendor Take-Back Mortgage
- Seller sites interest rate. Buyers can agree or not agree, but they must compromise if they want to purchase the house.
- High-interest rate. Interest rates are much higher for the buyer compared to a traditional mortgage.
- Two mortgage payments. For buyers that take on a partially funded vendor take-back mortgage, you’ll have two mortgage payments to make.
- The risk is high for sellers. If the buyer defaults, the seller will likely not get their money back.
When Does A VTB Mortgage Make Sense?
This type of loan is beneficial for a buyer who is unable to get approved for a large enough loan from the bank – either due to a variety of reasons.
It is a great choice for a seller who is having trouble selling their home, especially during a buyers’ market and wants to make their property more competitive on the market.
Bottom Line
A vendor take-back mortgage can cut out the need for a loan from the bank or help a buyer gain access to more money. The buyer and seller can negotiate a loan based on both of their financial needs.
However, the rewards and risks are both high for this option. Interest rates can be higher, buyers who choose a partially funded vendor take-back mortgage will be paying off two mortgages, and the seller can lose their loan if the buyer defaults.
For sellers eager to sell their home that has been on the market for a long time or for buyers interested in purchasing their dream home with limited funds – this financial option can get you what you want. But those who are interested must weigh the risk and reward.
