What is Mortgage?
Vendor take back mortgage aka Seller Take Back Mortgage is an arrangement between buyer and a seller where real estate seller (subject property) offers the buyer required funds in full or part of it, to help settle the sale of the real estate property.
After the sale is concluded seller and a buyer becomes lender and a borrower respectively for each other.
Run with me for a second. Let’s say you have a friend, Richard, who is facing a difficult home-buying choice; walking away from a house he wanted to purchase in Mississauga, because he was not able to get a home mortgage, or finding another way to finance it.
Similarly to many other people, Richard didn’t have enough down payment. Here’s where Vendor Take Back comes into play: the home-seller can offer to help him buy the house by providing part of the funds needed to close the deal.
Real Estate Buyers Benefits With (Seller Take Back) Mortgage
The advantage of Vendor Take Back (Seller Take Back Mortgage ) is that you can end up with a larger mortgage than the bank was originally willing to provide.
This type of mortgage helps promote the sale of the property by making it attractive to buyers who can’t find a mortgage lender for their deal.
This is common in commercial deals, however sophisticated Real Estate investors buy investment property by using seller take back mortgages.
Real Estate Sellers Benefits with Vendor Take Back Mortgages(Seller Take Back Mortgage)
This attracts sellers because it provides an opportunity to collect better returns and increase their cash flow. Even if the buyer does not pay a higher price, the interest rate charged by the seller is rather higher than something that a bank would charge.
However most investors are willing to pay a premium for a real estate they do not have to finance, using the traditional bank financing especially since Jan 01, 2018 due to implementation of mortgage stress test.
3 Tips To Buy Real Estate Vendor Take Back Mortgages
- Get an experienced, and open minded realtor who understands and knows how Vendor Take Back works and is willing to work with you on it
- Hire a competent mortgage broker who understands this strategy well and discuss your options in advance
- Do not ignore private home sales. That is where this will get a lot easier
What Are The Limitations of Vendor Take Back Strategy ?
In general when both seller and buyer agree there are no limitations to seller take back mortgage. The limitations may arise when buyer intends to buy real estate with the help of funding from Canadian banks along with vendor take back.
Scenario
Purchase Price of the real estate = $750,000
After checking clients Credit worthiness, Income Bank approved this mortgage for 80% Loan to Value
Total Down Payment required to close deal = 20% ($150,000) of the purchase price. However client is only able to prove 90 days proof for $112,500 (15% of the purchase price).
Since the sellers was very cooperative they agreed to lend buyer the remaining balance of $37,500 amortized over 2 years . The interest rate is 6.99% annually. Borrowers agrees to pay both Principal and interest payments monthly.
The deal looks good and buyer is happy and both parties are ready to close the deal on time however if it was not set up and disclosed to the lender properly the bank may decline this deal on the basis of but not limiting to following points;
- Down payment can not be borrowed
- Failing the mortgage stress test once the vendor take back mortgage payment is added to the monthly liabilities.
Is VTB Different than 2nd Mortgage ?
From lien standpoint, VTB do not differ from 2nd mortgages. The main difference could be the difference between interest rates one pays with vendor take back back and second mortgages.
Secondly, buyers do not have to look for a lender out side if seller is willing to work with the buyer. There is a stronger possibility of saving money and getting the deal closed on time.
All vendor take back mortgages are registered as a lien on the subject property. The position however depends upon the mortgage amount and involvement of other lenders.
As a general rule of thumb, any Canadian Institutional lender including major banks, mono-lenders or alternative B lenders mortgage loans are registered as first mortgage.
The vendor take back mortgage or any other credit/ loans against the property are registered as second and third mortgages.
If you have any further questions, connect with Mortgage Delivery Guy and let’s set up a plan unique to your needs, and make you a proud home owner!