What Is a Vendor Take Back Mortgage?
With a vendor take back mortgage, the seller acts as the lender and provides a loan to the buyer for a portion of the purchase price. This type of mortgage involves the seller of the house providing a loan to the buyer instead of a traditional bank.
The loan is secured by a mortgage on the property and is typically used to supplement the buyer's down payment. The buyer then makes regular payments to the seller, just as they would with a traditional mortgage.
One advantage of a vendor take back mortgage is that it can be easier to qualify for than a traditional mortgage, because the seller may be more flexible with the terms and requirements of the loan. However, it's important to carefully consider the terms of the loan and ensure they are fair and reasonable for both parties.
Definition of a Vendor Take Back Mortgage
A vendor take back mortgage is a type of financing arrangement where the seller of the property acts as the lender, essentially "taking back" a portion of the purchase price in the form of a mortgage.
In this type of arrangement, the buyer will typically provide a down payment and then borrow the remaining funds from the seller. The seller will then act as the lender, providing the buyer with a mortgage to cover the remaining amount of the purchase price.
One of the key benefits of a vendor take back mortgage is that it can make it easier for buyers to secure financing, especially if they have a less-than-perfect credit score or don't have a large down payment available. Additionally, vendor take back mortgages can be more flexible than traditional mortgages, with negotiable terms and interest rates.
However, it's important to note that vendor take back mortgages can also come with some risks. For example, the interest rates on these types of mortgages may be higher than those offered by traditional lenders, so it’s important to weigh the pros and cons.
Types of Vendor Take Back Mortgages
Partially-Funded Vendor Take Back Mortgage
A partially-funded vendor take back mortgage is when only part of the home’s sales price is on the vendor take back mortgage. The remaining portion might be made through a down payment or a mortgage with a traditional bank.
For example, a home is sold for $500,000, but the buyer's bank approves them for a mortgage of only $400,000. The remaining $100,000 could be put on a vendor take back mortgage.
Fully-Funded Vendor Take Back Mortgage
For a fully-funded vendor take back mortgage, the entire purchase price of the home is the amount on the mortgage. So if the home is sold for $500,000, then the vendor take back mortgage would be for $500,000.
Upon the home's sale, there won't be a cash exchange, because there is no down payment. Instead, the full $500,000 is paid through mortgage payments from the buyer.
Pros and Cons for Buyers
Higher Chance of Approval
The main reason for a vendor take back mortgage is the higher chance of being approved. If you haven’t been approved for a mortgage or approved for a small amount at traditional banks, a vendor take back mortgage might be a better option.
Because you are negotiating with the seller of the house, you might be able to get approved for a loan on the house in situations where a bank or lender would not approve you.
Lower Down Payment
Another advantage of a vendor take back mortgage is that it could allow you to make a lower down payment than you would with a traditional mortgage. This can be especially helpful if you do not have a large amount of cash on hand for a down payment.
Flexible Repayment Terms
Another advantage of a vendor take back mortgage is that it often comes with more flexible repayment terms than a traditional mortgage.
The seller can negotiate the interest rate, repayment period, and other terms of the mortgage with the buyer. This can be helpful if you have unique financial circumstances or if you need a more customized repayment plan.
Higher Interest Rates
One of the biggest downsides of a vendor take back mortgage is that the interest rates are typically higher than those of a traditional mortgage. This is because the seller is taking on more risk by financing the purchase, and wants to be compensated for that risk.
As a result, you will likely end up paying more in interest over the life of the loan.
Pros and Cons for Sellers
Increased Desirability
As a seller, the main reason you’d ever consider a vendor take back mortgage is in a buyer’s market. If you’re having difficulty selling your house, a vendor take back mortgage can make your house more attractive to buyers.
Interest Payments
Increased payments from interest offsets some of the risk of vendor take back mortgages for sellers. Assuming the buyer makes all of the mortgage payments, a seller would make more money on a vendor take back mortgage than a traditional one, because you’re also getting interest payments.
Deferring Capital Gains Tax
To defer capital gains tax on commercial and investment properties, you can use a vendor take back mortgage to the buyer. This allows you to delay the payment of capital gains tax on any profits from the property for 5 years.
By selling a capital property but not receiving the proceeds immediately, you can defer the capital gains tax on the profit. This deferral can be spread out over 5 years, at a rate of $40,000 per year.
Increased Risk
A vendor take back mortgage puts the financial risk on the seller instead of a bank. That means if the buyer can’t pay the mortgage, the seller would have to pursue the buyer for the missed payments, up to and including repossessing the house and paying out the traditional bank mortgage.
People looking for a vendor take back mortgage might be doing so because they haven’t been approved for a mortgage by traditional banks. They could have low credit scores, insufficient income, or other factors that make them higher risk when it comes to repaying loans.
Ask Your Mortgage Broker
Your mortgage broker can help you navigate the vendor take back mortgage process and answer any questions you may have, whether you’re a buyer or seller.
The current housing market, interest rates, and mortgage approvals all impact what’s right for you. To find out if a vendor take back mortgage makes sense for you, contact Spire Mortgage.
