A vendor take back mortgage is a type of mortgage that benefits both buyers and sellers in a unique way. While these types of mortgages are most common in commercial markets or with income properties, they can be used when purchasing a single family home as well. Let's explore what a vendor take back mortgage is and when you might leverage this type of set up.
What Is A Vendor Take Back Mortgage?
A vendor take back mortgage is when the seller of a property extends a loan to the buyer in order to secure the sale of that property. This is unique and advantageous in a number of ways.
First, this benefits you as the home buyer in that you don't need to come up with a full down payment all on your own. Imagine you are looking to purchase an investment property that is listed at $400,000. With investment properties, a 20% down payment is required, so this means you would need to come up with $80,000 cash. Rather than struggling to come up with this amount, you could consider a vendor take back mortgage.
With a vendor take back mortgage, the seller might agree to extend a loan of $40,000 to you which would make up half of your down payment. In essence, you have two different loans -- one to your big back for $320,000 and one to the seller for $40,000.
| Example scenario | |
|---|---|
| Purchase Price of Home | $400,000 |
| Traditional Down Payment Requirement | $80,000 |
| Down Payment from Your Pocket | $40,000 |
| Loan from Seller | $40,000 |
| Loan from Big Bank | $320,000 |
In addition to this arrangement being advantageous to the buyer, it is also advantageous to the seller. With vendor take back mortgages, sellers will typically be offered what their property is actually listed for rather than needing to sort through lowball offers.
With vendor take back mortgages, the seller's name remains on title as they continue to have a stake in the property. Additionally, they will also collect interest (approximately 6%) on the money they have lent to the buyer. This type of scenario might be suitable for a property owner who is looking to free up some cash but may still want to keep some money invested in the property they own.
When To Consider a Vendor Take Back Mortgage
As a home buyer, you might consider a vendor take back mortgage any time you are struggling to come up with a down payment for a desired property. Perhaps you are just breaking into the income property market and a larger commercial market and it's difficult to come up with a larger down payment. Negotiating a vendor take back mortgage can be advantageous to you if you're looking to get over that initial hump getting into the market.
The negative component to this is that you will be paying a higher interest rate directly to the seller for the amount you are borrowing for that portion of the down payment. This is generally paid over a short period of time though.
As a home owner, you might consider a vendor take back mortgage if you are looking to sell your property but don't need all the money right away. Leaving money in the property you are selling and collecting higher interest payments on it is a great way to let your money work for you. This type of arrangement also protects you from getting taxed heavily on the sale of a higher priced property.
Additionally, arranging a vendor take back mortgage almost always confirms that you will get the full listing price for your property. If you are selling your property and want to avoid dealing with multiple offers and negotiating all sorts of conditions, a vendor take back mortgage might be a good solution. These types of mortgages often lead to a quicker time frame for selling your property too.
If you are in a position where this type of mortgage might be beneficial to you, don't hesitate to reach out. We are happy to provide any assistance you might need including answering questions you might have or figuring out the particular logistics to make a deal happen.
