Key Takeaways A mortgage lender is any financial institution or individual that lends money to help people buy a home.In Canada, mortgage lenders range from very large banks, to smaller banks, credit unions, alternative lenders, and even private lendersWhen choosing…
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.
- 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
What is Vendor Take Back Mortgage?
A Vendor Take Back Mortgage or seller take back mortgage is when the seller of the property acts as the vendor for the buyer.
Essentially, it is a type of mortgage in which the buyer of a property obtains a loan from the seller to secure the sale of the property. This could be for the full price of the home or partial coverage of it (such as a down payment). Instead of dealing with a middleman, the seller acts as the mortgage lender themselves, and all the buyer’s monthly payments go to them.
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.
- The seller in a take back mortgage has to own the house outright in order to provide this option.
- 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.
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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.
How does a VTB Mortgage impact the buyer and seller?
We’re sure you’d like to know what the exact impacts are with a VTB mortgage and how it’ll affect you as either a buyer or seller. Rest assured, we have the answers. 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 to know are:
- Sell their home faster. With little surprise, in a buyer’s market, selling a home can take way longer than usual. To get the home off their hands, a take back mortgage offers the most streamline process by casting the net for candidates wider.
- Monetary incentives. It’s more than likely that the interest rates the buyer will receive when the owner holds the mortgage are higher. This creates a nice profit for the seller. They end up making more on monthly payments than if they sold in a lump sum sale.
- Defer capital gains tax. This type of mortgage allows the seller to spread their tax obligation over a series of years.
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 to know are:
- Flexibility for shopping around. The buyer will have access to more properties within their search range than they would if going down a traditional mortgage approach due to financial restraints.
- Not limited to financial situations. On the same token, with a vendor take back mortgage they don’t have to worry about where they stand financially – especially as it relates to credit score or savings for a down payment.
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.
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 may create more of a burden than need be 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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