Loan Types

What is a Vendor Take Back Mortgage?

What is a Vendor Take Back Mortgage?
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  • nesto
| Feb 1, 2022
Reviewed, Aug 10, 2023
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    If you’re wondering if you should pursue a vendor take back mortgage, you’re in the right place. In this post we’ll guide you on what a VTB mortgage is, the roles of the buyer and seller in this mortgage type, and various benefits as well as risks associated with it.


    Key Takeaways

    • A vendor take back mortgage (seller take back mortgage) is when the seller of a property acts as the vendor for the buyer
    • A vendor take back mortgage is predominantly used by buyers if they don’t have enough money upfront for a down payment, or have a poor credit history
    • While a vendor take back mortgage seems like a great option outright, there are various risks associated with it for both the buyer and seller that need to be addressed 

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    What Is A Vendor Take Back Mortgage?

    A vendor take back mortgage is a financing option where the seller of a property extends a loan to the buyer, enabling them to complete the purchase. In this arrangement, the seller becomes the lender, and the buyer makes regular payments to them, similar to a traditional mortgage. However, it’s important to note that a vendor take back mortgage can only be offered if the seller owns the property outright, without any existing mortgages.

    The amount of money provided to the buyer through a vendor take back mortgage can vary. It can range from covering closing costs or transfer taxes to more substantial amounts, such as the down payment or a portion of the mortgage. The interest rate for a vendor take back mortgage is determined by the seller and agreed upon by the buyer. Typically, the interest rate is higher than that of a traditional mortgage.

    Who Qualifies For A VTB Mortgage? 

    Before we get into the overall impacts associated with the vendor take back mortgage, let’s first outline some qualifications of it. After all, it’s important to know if this is applicable to you.

    1. The seller in a take back mortgage has to own the house outright in order to provide this option.
    2. The buyer in a vendor take back mortgage has poor credit history and/or too little funds to cover initial down payment/total costs.

    If as a seller you don’t own your property outright, then you can’t engage in a vendor buy back mortgage with your potential buyer. 

    On the other hand, if you’re a buyer with enough funds to cover a down payment, or you have great credit, you’re better off seeking other mortgage options. nesto can help you out.

    When Does A VTB Mortgage Make Sense? 

    Now that you’re well-versed in what a VTB mortgage is, it’s time to dive in a bit further and explain why a buyer may seek out VTB financing in the first place. There are 3 specific situations that can call for this type of financing of a home. 

    • Buyer’s market. This means that there are more properties available to buyers. Translation: competition is high for sellers. To counteract this, sellers may offer VTB mortgages to entice buyers.
    • Better access to dream homes. On the same token, for a buyer without extensive financial means, the take back mortgage allows them to access homes that may otherwise be outside their budget.
    • A workaround for those with poor credit. Without a solid credit history, securing a traditional mortgage is hard to do and finding a dream home with poor credit is even harder to do. Using the VTB mortgage approach, the buyer has more access to homes than they’d  be able to do normally due  to their financial restrictions. 

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    How does a VTB Mortgage impact the buyer and seller?

    Let’s go through the benefits and risks associated with each situation to give you a holistic point of view to make the best move for yourself.

    Benefits of the Vendor Take Back Mortgage for the Seller 

    In a VTB mortgage, the benefits for the seller are pretty substantial. In essence, the seller will have the upperhand in the relationship with the buyer. It’s their home, after all, and they are taking a risk in lending you money. Some benefits include:

    • Additional Income: Since the interest rate on a vendor take back mortgage is typically higher than that of traditional mortgages, sellers can generate additional income from the interest payments made by the buyer.
    • Capital Gains Tax Deferral: By structuring the sale as a vendor take back mortgage, sellers can potentially defer capital gains taxes on the property. This can result in significant tax benefits for the seller.
    • Faster Sale: Without the involvement of a financial institution, the process of selling a property with a vendor take back mortgage can be quicker and more streamlined. This is especially beneficial for sellers who need to move within a specific timeframe.

    Benefits of the Vender Take Back Mortgage for the Buyer

    In a VTB mortgage, the benefits for the buyer are not as substantial from a monetary incentive standpoint, but still worth mentioning nonetheless. Some VTB mortgage benefits for the buyer include:

    • Access to Financing: Buyers who may not qualify for a conventional mortgage due to credit history or income limitations can still purchase a property through a vendor take back mortgage.
    • Flexible Terms: Unlike traditional mortgages, the terms of a vendor take back mortgage can be negotiated between the buyer and seller. This flexibility allows buyers to tailor the mortgage to their specific needs and financial situation.
    • Avoiding Mortgage Insurance: In some cases, a vendor take back mortgage can help buyers avoid the need for mortgage insurance, which is typically required for high-ratio mortgages with down payments less than 20%.

    Risks & Interest Rate Concerns with a VTB Mortgage

    Every coin has a flipside, and just as there are benefits to this VTB mortgage, there are also risks associated with it for both the buyer and seller. We outline what those risks are for you below: 

    For the buyer:

    • Higher interest rates. As sweet as a VTB mortgage may be, seeing that buyers can get a home otherwise outside their budget, it isn’t without an impact. They’ll be paying higher interest rates on a tack back mortgage than they would on a traditional mortgage as the seller sets the rate, not a lender.
    • Acts as a second loan. This situation yields an automatic second mortgage for the buyer. Having a traditional mortgage to pay monthly atop a VTB mortgage for the designated loan amount can add up. If you’re not careful with what you’re paying, you could end up in foreclosure.

    For the seller:

    • High risk, high reward. As a seller there’s an inherent risk involved with loaning a buyer money to afford a  home. The VTB mortgage is essentially a second mortgage and if the  buyer defaults, the seller will  likely not get that money back. Not to mention, they may have to deal with lawyers and added expenses in the process. 

    Using nesto to apply for a traditional mortgage alternative

    As you can see, VTB mortgages while on the surface seem like a great alternative if you have poor credit history or trouble coming up with a down payment, the risks inherently outweigh the benefits. 

    We understand that for many, the accessibility of a traditional mortgage feels out of reach; however, that’s why our team of mortgage experts exist. At nesto, we’re on a mission to find the lowest possible rates and make mortgages affordable. 

    Our mortgage experts are equipped with the know-how to make custom mortgage strategies that will meet you where you are. This way, you can avoid the high interest rates associated with a VTB mortgage and not have to balance 2 home loans.

    FAQ

    What does vendor take back mortgage mean?

    A vendor take back mortgage is a financing option where the seller of a property extends a loan to the buyer, enabling them to complete the purchase. In this arrangement, the seller becomes the lender, and the buyer makes regular payments to them, similar to a traditional mortgage. 

    What is an example of a vendor take back mortgage?

    A VTB mortgage may occur if the seller owns their home outright, with no mortgage to pay and the buyer is in a financial situation that might hinder them from buying a home, such as bad credit score or not enough initial funds.  

    Can you use VTB for down payment?

    Yes, the seller can loan you a portion or the entirety of the down payment, which you will have to pay back to the seller alongside your mortgage payments to the bank.

    What Are the Advantages of a Vendor Take-Back Mortgage?

    For the seller, the advantages are significant and include extra income and tax benefits. As for the buyer, they are able to access housing that they would not be able to afford otherwise.

    What Are the Disadvantages of a Vendor Take-Back Mortgage?

    For the seller, the risks are as high as the rewards. The seller can make a profit, but if the buyer defaults, the seller will not see that money. 

    As for the buyer, they are essentially taking out a second loan and will have overall higher interest to pay.

    Final Thoughts: Is Vendor Take Back Mortgage Right For You? 

    As with anything in life, there’s a different path for everyone. While a VTB mortgage may be a great fit for some buyers in the current market, it has the potential to become a burden down the line

    That said – Why start off your home journey feeling overwhelmed by payments? We say, it’s not worth it. Speak with our team today to see how you can secure a mortgage that’s right for you.


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