What Is a Vendor Take-Back (VTB) Mortgage?
A vendor take-back (VTB) mortgage is a unique type of mortgage in which the seller of a property is also a lender for the sale.
With a VTB, the buyer makes at least some mortgage payments to the seller, who may provide the entire mortgage or a separate loan in addition to financing from a traditional third-party lender, such as a bank.
A vendor take-back mortgage can be beneficial under the right circumstances, but both seller and buyer should consider all the risks before using a VTB.
Why use a vendor take-back mortgage?
Vendor take-back mortgages can be useful in a number of situations, including:
When a buyer can’t get approved for a mortgage.
When a real estate investor can’t access the capital needed to make a 20% down payment.
When a motivated seller wants to entice buyers with the option of paying less in interest.
When a buyer needs cash in addition to a traditional mortgage to complete a real estate transaction.
In these cases, a seller might agree to act as a lender for the buyer, greasing the wheels for the sale and earning some additional income through interest payments.
Vendor take-back mortgages vs. traditional mortgages
Vendor take-back mortgage | Traditional mortgage | |
|---|---|---|
Step 1 | A buyer decides to buy a piece of real estate, but they don’t have the ability to pay completely in cash. | A buyer decides to buy a piece of real estate, but they don’t have the ability to pay completely in cash. |
Step 2 | After getting pre-approved for a mortgage, the buyer looks for a property and makes an offer. | After getting pre-approved for a mortgage, the buyer looks for a property and makes an offer. |
Step 3 | If the pre-approval amount is not sufficient, the buyer approaches the seller about funding some, or all, of the purchase through a VTB. The two parties agree to mortgage terms, including a repayment schedule and an interest rate. | The buyer fills out a mortgage application at a bank or through a mortgage broker. |
Step 4 | The VTB amount is “loaned” to the buyer, though no cash changes hands. | The sale closes, the seller receives the full sale price and then has no further contact with the buyer. |
Step 5 | The buyer repays the seller over the life of the loan. Until the loan is repaid, the property is collateral for the loan. If the buyer falls behind on mortgage payments, the seller can claim the property. | The buyer owns the property, but they also owe the bank the loan amount plus interest. They repay that amount over time. The property acts as collateral for the loan. If the buyer falls behind on mortgage payments, the bank can claim the home. |
Unique features of vendor take-back mortgages
Ongoing relationship between buyer and seller. 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, like the seller providing guidance to the new owner during a transition period.
Less reliance on banks for financing. Typically, a successful home sale consists of three parties giving their approval: the buyer, the seller and the lender. With a VTB, there may only be two.
Looser qualification guidelines. Obtaining a loan from a traditional lender usually means going through a strictly standardized process. A VTB seller doesn’t need to follow every guideline a bank does. The seller may charge a higher interest rate than a bank but not require the buyer to pass a stress test.
Cash changes hands slowly. The seller doesn’t receive a one-time payment when the sale closes. Instead, they get paid back gradually over time, like a bank.
Pros and cons of a vendor take-back mortgage
Pros
- The ability to create unique terms via a VTB may be the best way to complete a sale.
- Getting paid over multiple years could lower the tax burden for the seller.
- The interest charged in a VTB mortgage goes directly to the seller, not the bank.
- The buyer may benefit from the seller’s expertise after the sale is done.
Cons
- The bulk of the sale price is locked up in the form of future payments.
- If a VTB mortgage winds up in default, the seller may run short of cash or have difficulty selling the property again.
- A VTB agreement is dictated by the individuals involved, not traditional mortgage rules.
- A buyer who can’t get financing from a traditional lender may not be able to handle a large mortgage.
Frequently asked questions
How does a VTB mortgage work in Canada?
How does a VTB mortgage work in Canada?
A vendor take-back mortgage is when the seller of a property agrees to finance some, or all, of the purchase by taking payments directly from the buyer over a specified period of time.
What are the disadvantages of a vendor take-back mortgage?
What are the disadvantages of a vendor take-back mortgage?
A vendor take-back mortgage can be risky for the seller because they won’t receive the full payment for their property until the end of the mortgage term. With a traditional mortgage, the seller gets paid in full on closing day.
For buyers, one disadvantage of a VTB mortgage is paying a higher interest rate compared to what traditional lenders might offer.
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Clay Jarvis
