Vendor Take-Back (VTB) Mortgage: What It Is and How It Works

A vendor take-back mortgage is a possible alternative for buyers who can't qualify for traditional loans, but there are risks for both buyer and seller to be aware of.

A vendor take-back (VTB) mortgage is a unique type of mortgage in which the seller of a property is also the lender for the sale.

With a VTB, the buyer makes payments to the seller instead of to a traditional third-party lender, such as a bank. This type of loan can be beneficial under some circumstances, such as when buying a business or commercial property or if the buyer can’t get bank approval for the amount they need. Both seller and buyer should consider all the risks before using VTBs.

Vendor take-back mortgages vs. traditional mortgages

A typical home buying process looks like this:

A buyer wants to buy a home, but they don’t have the ability to pay completely in cash.
To fund the purchase, the buyer combines cash savings and any equity, if they already own a home and plan to sell it. To cover the difference, they must apply for a mortgage and be approved.
The buyer makes an offer on a home, and the seller accepts the offer.
After the sale closes and the seller receives the full amount of the sale price. They have no further contact with the buyer.
The buyer owns the house, but they also owe the bank the loan amount plus interest. They repay that amount over time.
The house becomes collateral for the loan; if the buyer falls behind on mortgage payments, the bank can claim the home.

Here’s what a vendor take-back mortgage looks like:

A buyer wants to buy a home, but they don’t have the ability to pay completely in cash.
They find a property seller who is willing to use a VTB mortgage. The seller can’t have an existing mortgage on the property.
They agree to terms of the mortgage. For example, the seller may require a down payment. They also must agree on an interest rate, which may be higher than prevailing mortgage rates. The remaining balance of the purchase price is essentially loaned to the buyer, though no cash changes hands.
The buyer repays the seller over the life of the loan.
Until the house is repaid, it is collateral for the loan. If the buyer falls behind on mortgage payments, the seller can claim the home.

Summary of key differences

The buyer and seller maintain a relationship after the sale is made. This can be as simple as sending and receiving a monthly payment, but in some cases there could be a deeper connection between the two parties. For example, someone selling a rental property or a large piece of land that requires a lot of upkeep might provide valuable guidance to the new owner during a transition period.

The buyer isn’t dependent on getting approval from a bank to receive funding. Typically, a successful home sale consists of three parties giving their approval: the buyer, the seller and the lender. With a VTB, there are only two.

The terms of the loan aren’t necessarily dictated by conventional terms. Obtaining a loan from a traditional lender usually means going through a standardized process, filled with routine paperwork and loan terms. The VTB seller may be interested in the same types of information as a traditional bank — your credit score or current income sources, for example — but they don’t necessarily need to follow every guideline. For example, the seller may charge a higher interest rate than a bank would, but they may not require the buyer to pass a stress test or have a specific debt service ratio.

Cash changes hands slowly. The seller doesn’t receive a one-time payment when the sale closes. Instead, they get paid back slowly over time, like a bank.

Pros and cons of using a vendor take-back mortgage

Pros

Can provide flexibility needed to close the deal. Traditional loans may not fit the needs for unusual situations or properties. In some instances, a traditional lender may not approve you for the amount you need, but a seller will. The ability to create unique terms via a VTB may be the best way to complete a sale.
Sellers could lower their tax bill and gain a source of consistent cash flow. Lump-sum payments can mean larger tax bills. Getting paid over multiple years could lower the tax burden for the seller.
The built-in transition resource could be a value add. The buyer may want the seller’s expertise after the sale is done, and the seller might want to be involved in handing over the property. This could be especially helpful if buying a business or a commercial property that would benefit from the continued involvement of someone familiar with it. While this kind of involvement doesn’t require the use of a VTB, a VTB can establish shared incentives for both parties in a more formalized manner.

Cons

Seller receives limited cash upfront. Often, a seller will use proceeds from the sale of a property to fund their own purchase. With a VTB, a bulk of the sale price is locked up in the form of future payments.
Seller takes on what could be a concentrated risk. Some borrowers end up unable to make their mortgage payments. Lenders usually can withstand some defaults because they have thousands of other loans that are being repaid successfully. If a VTB mortgage ends up in default, the seller may face difficulty in replacing the lost cash flow they were expecting.
No institutional guardrails. Working with a traditional mortgage lender means going through an established, proven process. That process can feel complex to navigate, but a VTB presents challenges of its own. Whether you’re the buyer or the seller, you’ll need to figure out steps of the process you’d otherwise trust the lender to decide. This might require hiring an attorney, which adds cost.
It could be a sign that the buyer can’t afford it. If you can’t get financing from a traditional lender, you may not be able to afford the mortgage. Note that this isn’t necessarily the case, though. For example, perhaps you’re early in your career in a lucrative field, but don’t have the credit history needed to buy the home you want as a first-time home buyer