A vendor take-back mortgage can be a great opportunity for both the seller and the buyer. I will explain all the benefits for both buyers and seller, but would like to be clear with some risks as well!
Let me begin by describing what a VTB is all about!
The vendor is the seller and these two terms are interchangeable. So vendor take-back and seller take-back mortgages are one and the same. In this situation, the seller of a home lends money to the buyer of the home and so extends a loan for a portion of the sales price. This means that the seller may take on the role of a lender and would also be able to offer certain options or incentives to the buyer. Since the seller owns the property, when the sale closes, money doesn’t change hands in the same way it does with a traditional mortgage. Once the buyer purchases the property, they make mortgage payments to the seller until the end of the term, the house is sold or the mortgage is paid off.
For the buyer, a VTB can mean access to financing in a situation where they have been turned away from A or even B lenders for several reasons. Traditional mortgages often require a stress test, specific down payment percentages and credit scores above a certain amount. Lacking in these prerequisites, buyers won’t qualify for conventional financing and therefore, VTBs can be a great option and relief on a house-hunting journey. There are many more negotiations that can be had compared to a traditional mortgage. Offering a VTB as a vendor also has advantages in specific markets, specifically a buyer’s market, where house prices are inflated (and it’s tougher for buyers to qualify) and there is more intense competition. It’s great for sellers too as it may mean closing a sale that might otherwise have not been possible. The interest portion of the loan can also generate additional income.
At this point, a VTB may sound quite appealing, but it’s important to keep in mind some key considerations. The buyer must still make monthly payments to the seller as their lender according to an agreed upon schedule and timeline. Buyers should also be aware of any additional closing costs, down payments and any other related transaction fees.
For the seller, the VTB is essentially a second mortgage and if the buyer defaults on payments, the onus is on the seller! Sellers will generally need legal documents prepared by a lawyer and these may be costly.
If you’re an investor, you could also benefit from a VTB arrangement. For vendors owning a property outright, a VTB can assist in deferring capital gains from the purchase price and enjoying some tax benefits. Naturally, the income generated from the monthly mortgage payments is also highly beneficial. For investors with poor credit, a VTB can act as a short-term financing solution!
Vendor-take-back mortgages have been gaining popularity these past few years, as the markets have been somewhat unusual and competitive! For some buyers it could really be their chance of getting into the housing market. Make sure to seek professional advice when considering a VTB mortgage and to work with a lawyer to review and understand the contract. Despite the legal fees, it’s critical to ensure that your interests are protected and the agreement is in line with your financial goals!