Growing in popularity over the past few years, the vendor take-back mortgage can help buyers to purchase and sellers to find qualified buyers – especially in a tough market.
What is a vendor take-back mortgage – or VTB?
When a seller offers to lend the buyer a portion of money towards the down payment – this is a vendor take-back mortgage. Essentially it is a second mortgage offered at lower than current market interest rates to the buyer from the seller to facilitate the sale. It is a legally binding secondary charge on title to the property. The seller then will collect payments from the buyer on that second mortgage and the mortgage is fully repaid by the buyer upon refinance of the property or sale of the property at a future date.
What are the benefits of a VTB?
To the seller the VTB allows them to access buyers who don’t have sufficient down payment or in some cases a buyer who may have credit issues which impact their ability to get a mortgage through a traditional lender such as a bank. This can also be a great marketing tool for sellers when property sales are slow to help move the house more quickly. For sellers of investment properties they may be able to defer capital gains on the sale if a portion of the proceeds is provided back to the buyer as a second mortgage. It is important to talk with your accountant before buying or selling an investment property to be clear on tax laws, etc.
For those buyers who may be struggling to buy, a VTB allows them to access more money for a down payment.
What do you need to qualify for a mortgage with a VTB?
If the buyer is able to qualify based on income and credit, the lenders (regardless if it is a bank, mortgage company or alternative “B” lender) will require a minimum of 10% down payment from the buyer in addition to the VTB funds. There are some private lenders, rent-to-own and others who will provide a VTB and first mortgage financing – but at higher interest rates. So do your homework and talk with your mortgage specialist, realtor and lawyer, to ensure you are clear on all your options before proceeding with this kind of purchase financing strategy.
Note: VTB’s are also common in the purchase of commercial properties.