What Is a Vendor Take-Back Mortgage?
A vendor take-back mortgage is a unique kind of mortgage where the seller of the home extends a loan to the buyer to secure the sale of the property. Sometimes referred to as a seller take-back mortgage, this type of loan can benefit both the buyer and the seller. The buyer might be able to purchase property above his bank-determined financing limit, and the seller can get his property sold.
- A vendor take-back mortgage happens when the seller of the home extends a loan to the buyer for some portion of the sales price.
- The seller retains equity in the home and continues to own a percentage equal to the amount of loan until the vendor take-back mortgage is paid in full.
- Both types of mortgages can be subject to foreclosure in the event of the borrower's default on the loan terms.
Understanding Vendor Take-Back Mortgages
Most buyers already have a primary source of funding through a financial institution when they enter into this type of arrangement, so a vendor take-back mortgage is often a second lien on the property.
The seller retains equity in the home and continues to own a percentage of its value equal to the amount of loan. This dual possession continues until the buyer pays off the original amount plus interest. The second lien serves to guarantee the repayment of the loan. The seller can seize the property that's the subject of the lien if the obligation isn't satisfied.
Sellers benefit from vendor take-back mortgages because they can generate extra income from the interest on the loan.
Vendor Take-Back Mortgage vs. Traditional Mortgage
A vendor take-back mortgage most often occurs in conjunction with a traditional mortgage, in which a homebuyer pledges her house to the bank as collateral for the loan. The bank then has a claim on the house should the home buyer default on the mortgage. In the case of a foreclosure, the bank can evict the home's occupants and sell the house, using the income from the sale to clear the mortgage debt, as can the seller or second lienholder in the case of a vendor take-back mortgage.
The most common form of traditional mortgage is the fixed-rate mortgage, in which the borrower pays the same interest rate for the life of the loan. Most fixed-rate mortgages have between a 10-year and 30-year term, during which the borrower's payment, including interest, won't change if market interest rates rise. The borrower might be able to secure a lower rate by refinancing the mortgage if market interest rates drop significantly after the time of purchase.
Several factors can affect your interest rate on a traditional mortgage, from your credit history to how much of a down payment you put down to where your property is located. Likewise, several factors will affect the interest rate you'll pay on a vendor take-back mortgage, including how much of a loan you're asking the seller to carry. The rate will often be higher when the seller's mortgage is the second lien on the property, compensating him for the risk he's taking.
Example of a Vendor Take-Back Mortgage
Jane Doe is purchasing her first home for $400,000. She's required to make a down payment to a fixed-rate mortgage lender of 20%, or $80,000, but she accepts a vendor take-back mortgage instead of paying this amount herself.
The seller lends Jane $40,000 toward the mortgage down payment and agrees to pay $40,000 himself. This single property now has two separate loans. One is the fixed-rate mortgage with the financial institution for $320,000. The second is the vendor take-back mortgage for $80,000.