Vendor take back mortgage

When the buyer does not have enough cash to buy a home outright, but is a good credit risk, a vendor take-back or VTB mortgage may solve the problem. The seller, also known as the vendor, gives the buyer credit in the form of a mortgage for the balance owing. Ownership is transferred to the buyer, with some cash changing hands. The seller holds a mortgage for the balance. The term, vendor take-back mortgage, originated with the seller's selling the property to the buyer, then taking back an interest in the property as security for the mortgage debt, which represents the balance of the sale price.

Now, whether there is an actual transfer of interest back to the seller or not, the seller has a registered claim against the property as security for the debt, that is, mortgage. For example, if a property sold for $150,000, the buyer might give the seller $70,000 cash at the time ownership is transferred to the buyer. The balance of the sale price, $80,000, would be registered against the property as a traditional mortgage. The seller would become the mortgagee, with all the accompanying mortgage rights and legal powers. The buyer would become the mortgagor, with all the responsibilities of repayment.

The sale price, contract conditions, interest rate, and repayment terms should all reflect the degree of risk for the seller and the gains made by the buyer. The risks to the seller must not be taken lightly. Remember that there's no such thing as a sure thing. Even when the buyer seems to present a rock solid, low-risk profile as a mortgagor, the possibility of buyer default on the VTB mortgage still exists. The seller should understand the financial and legal implications of default, before agreeing to a vendor take-back mortgage.

When the buyer and seller negotiate the Agreement of Purchase and Sale, this option should be kept in mind when they first put the house on the market, sellers may wish talk to a mortgage broker to determine what interest rate, term, and other conditions are necessary to make the VTB mortgage saleable with the minimum discount. The mortgage is discounted when it is sold, that is, the seller receives a reduced amount, not the face value. For example, a $60,000 VTB mortgage would not yield the seller $60,000 cash if it were sold to an investor. The mortgage broker handling the sale of the mortgage would calculate a discount using factors such as interest rate, term, balance, and percentage of the equity to be mortgaged. If the home is being sold through a real estate company, the real estate professional involved can explain discounting in detail to the seller and ensure that the seller does not lose anything by offering a VTB mortgage to a buyer. Independent advice may be sought as well.

VTB mortgages can help achieve the price and terms necessary to buyers and sellers in a difficult real estate market, or with a hard-to-sell property. However, unless the seller sees the mortgage as an excellent investment after speaking to a financial adviser, or unless it is truly in the seller's best interests, not the buyer's, a VTB mortgage should not be the first option explored in negotiating the contract. Investment in a mortgage carries risk, which may not be attractive to all sellers. Independent legal and financial advice can help the seller determine whether the benefits outweigh the risks.

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