What is Vendor Take Back Mortgage?
Though not very common, it is a situation where the home seller (the vendor) becomes the lender for the buyer as well. It is an alternative when traditional mortgage is not an option, or when the seller would like to offer an incentive to a buyer. It allows the seller to lend money to the buyer for the purchase of their own property.
The property has to be owned by the seller, that is there cannot be a mortgage on the home at the time of selling. The buyer is still required to make regular payments to the seller as they would with any other lender. The interest rate is set by the seller and agreed by the buyer, and is usually higher than traditional mortgage interest rate. The amount of money provided to the buyer varies from enough to cover closing costs or transfer tax to more substantial amounts to cover the down payment or a portion of the mortgage.
Is it happening in the current market?
Vendor take-back mortgages have made their way back into the residential lending scene due to changes in the market and more stress put on buyers. It’s harder to acquire a mortgage because it’s harder to save for a down payment. In order to get access to mortgages, buyers are looking for different ways to get their down payments. It also helps sellers get their houses off the market.
Should you consider this as an option?
The vendor take-back mortgage is not the ideal lending situation. It is only used in specific situations when it benefits either the seller or the buyer, or both. In the Buyer’s Market, when there is a lot of inventory, the seller may offer thus as a way to entice buyers. At the same time, the seller can offer funding to a buyer who might not have the funds to make an offer, or may have a poor credit.
This becomes a win-win situation for both the buyer and the seller. The buyer is able to purchase a home even int he absence of a traditional mortgage. For the seller, he or she is able to sell the home and get the additional benefit of an increased cash flow from the interest.
It could make a viable home buying option for first time home buyers, newcomers or people on a work permit.
Advantages for Investors
The vendor take-back mortgage is used primarily for investors and commercial properties. Sellers can face huge capital gains taxes when they sell. This form of take-back mortgage helps defer capital gains from the purchase price. It allows the seller to spread their capital gains over the period that the loan will be paid back. Plus the benefit of generating monthly income.
For investors with a poor credit, this is a short-term financing solution before they can get something better from a mortgage lender. The buyer can also build their credit simultaneously by paying back the vendor. And in the longer run, the buyer can also use the equity in the property to obtain another mortgage setup with a more appealing interest rate.
Consideration for Sellers
This type of mortgage does come with some pros & cons as well for sellers. Vendor take-back mortgage is basically like a second mortgage. You could be faced with a buyer who is not willing or able to make their mortgage payments. So the payments can fall back on you for the balance of the sales price. You will have to work with an experienced lawyer on an agreement to protect you against loan defaults. Lawyers or in worse case a foreclosure, can add a lot of expense.
Consideration for Buyers
Basically you may have two loans to pay back. Often buyers get the vendor take-back mortgage to make the down payment to secure a mortgage from a bank. In a normal mortgage, you would pay the down payment, and the bank would pay the balance. You then make mortgage payments for that amount.
In the case of a vendor take-back mortgage, you might be given a portion or all of your down payment by the seller, you then pay the bank, and they transfer the funds to pay the balance of the purchase. You now have to begin paying back the seller for the down payment and the bank for the mortgage.
You must evaluate and calculate the monthly payments to ensure that you can afford these payments in a timely fashion.
Benefits of the Vendor Take-Back Mortgage
For the seller:
- You can sell your home faster.
- You can generate extra income from the interest.
- You can reduce the amount of taxes on capital gains.
For the buyer:
- It provides you with an alternative when faced with down payment or credit challenges.
- Although not everyone’s cup of tea, it is a lesser-known but viable option for arranged financing.
Source Credit: remax.ca