What is a Vendor Take Back Mortgage?

While today’s real estate market is normalizing, a real estate-related term is starting to pop up more frequently: Vendor Take Back Mortgage.

What is a Vendor Take Back Mortgage?

This is a lending arrangement where the Seller lends money to the Buyer for the purchase of their own home. The Seller and Buyer agree to an interest rate (often higher than traditional mortgage interest rates), repayment schedule (sometimes regular installments and sometimes no payments are required at all), repayment type (interest-only vs. blended payments), and term (typically shorter term than traditional mortgages). It essentially delays a portion of the proceeds of the sale to the Seller from the Buyer.

Benefits to the BUYER include the ability to finance the remaining portion of a purchase that is unavailable through traditional mortgage lenders due to poor credit, already at the max of your approval limit, or low downpayment. However, this results in 2 potential loan payments to keep up with and the possible requirement to come up with a lump sum payment in a short period (when the term is over). Depending on the Buyer’s situation, this may be difficult to manage. In a rising market, the hope would be that in 1-2 years (whenever the term is ending), the Buyer could re-finance the property, and any appreciation and hopefully, the Buyer’s improved financial situation would allow them to pay off the Vendor Take Back Mortgage.

Benefits to the SELLER include being able to potentially sell their property sooner in a balanced or Buyer’s Market by offering funds to a Buyer who may not otherwise have access to in order to complete a purchase, earning interest on the funds that the Buyer owes, and could also reduce the amount owing on property taxes if the property was owned as an investment. There is certainly a chance for default – Sellers will have to manage payments from the Buyer, which can be awkward or difficult if payments are not made on a timely basis. Also, despite additional legal fees to have this arrangement registered on title as a “second mortgage,” if the Buyers default on their bank mortgage as well and the property goes into foreclosure, the Seller may not recuperate the total amount of the Vendor Take Back Mortgage (or any at all depending on market conditions) after the sale of the property.

With today’s rising interest rates, Buyers are qualifying for lower mortgage amounts than they did in 2021, resulting in a reduction in their purchasing power. We may be seeing more and more instances of Sellers offering Vendor Take Back Mortgages in the days ahead to attract Buyers to specific listings, and potentially allowing a Seller to sell sooner. As always, Buyers and Sellers should seek the advice of their financial professional and their legal team before entering into such arrangements, but if done correctly, could offer a win-win to both parties.