What is a Vendor Take-Back Mortgage
A vendor take-back mortgage is a type of mortgage in which the seller offers to lend funds to the buyer to help facilitate the purchase of the property.
The vendor take-back mortgage can benefit both buyer and seller, as the buyer may be able to purchase property above their traditional financing limit, and the seller can move the property from their books.
BREAKING DOWN Vendor Take-Back Mortgage
A vendor take-back mortgage is unique kind of mortgage where the seller of the home extends a loan to the buyer to secure the sale of the property. As most buyers already have a primary source of funding through a financial institution, the vendor take-back mortgage is often a second lien on the property.
In other words, the seller retains equity in the home and owns a percentage equal to the amount due on loan. This dual possession continues until the buyer has paid off the original amount plus interest. The lien serves to guarantee the repayment of the loan. If the obligation is not satisfied, the seller may be able to seize the property that is the subject of the lien.
Sellers benefit from offering a vendor take-back mortgage as it can translate to a fast sale of the property. The seller can also generate extra income on the interest of the loan, increasing monthly cash flow.
Comparing Vendor Take-Back Mortgage and a Traditional Mortgage
In most cases, a vendor take-back mortgage happens alongside a traditional mortgage. In a typical residential mortgage, a home buyer pledges their 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 may evict the home's tenants and sell the house, using the income from the sale to clear the mortgage debt.
The most common form of mortgage is the fixed-rate mortgage or traditional mortgage. In a traditional mortgage, the borrower pays the same interest rate for the life of the loan. The monthly principal and interest payment never change from the first mortgage payment to the last. Most fixed-rate mortgages have a 15 or 30-year term. If market interest rates rise, the borrower’s payment will not change. However, if market interest rates drop significantly, the borrower may be able to secure that lower rate by refinancing the mortgage.
Because most buyers utilize a traditional mortgage when buying a property, the vendor take-back mortgage represents a second loan taken out on the property.
As an example, John Doe is purchasing their first home for $500,000. They are required to make a down payment to a fixed-rate mortgage lender for $100,000, but instead of paying this amount themselves they may use a vendor take-back mortgage vehicle. The seller will lend John Doe $50,000 for the mortgage down payment, and he will pay $50,000 himself. So, the one property has two separate loans. One is the fixed-rate mortgage with the financial institution for $400,000. The second is the vendor take-back mortgage for $50,000.