What Is a Vendor Take-Back Mortgage?

Financing is a topic that is front and centre when buying or selling a house. Real estate is the most valuable asset most of us will ever own, and very few people have the funds to pay in cash upfront.

Traditionally, a buyer will go to a bank or other accredited lender to apply for a mortgage. Other times, a more unconventional path is in order. A vendor take-back mortgage can be a viable option in some circumstances to streamline your transaction. This is the fancy, legal term for when the existing homeowner finances the sale of their own house instead of the buyer applying at a bank.

You’ll also hear it called “seller financing” or “seller take-back financing.” In any case, it allows you to bypass traditional lenders and move forward with your transaction. Now that you know the definition, let’s talk about when and why you might use a vendor take-back mortgage.

How much will your home earn in today’s market? Find out by booking your free home evaluation right here.

Understanding the Risks of Vendor Take-Back Mortgages

A vendor take-back mortgage (VTB) can have legal implications since you’re forgoing the traditional path. Since we are not lawyers, the legalities are beyond our scope, and we highly recommend speaking with a qualified lawyer before proceeding, whether you plan to use a VTB to buy or sell a home.

Even private loans are subject to laws such as the Interest Act, so some protections do exist for both the buyer and seller. They are also highly regulated in Canada, but not to the same degree as a bank.

Before proceeding, both parties will need to have a clear understanding of the terms. Everything should be in writing, including the agreed-upon down payment, interest rates, monthly payments, and what happens if the buyer defaults.

Before buying or selling a home, it helps to understand the market better. The posts below can help bring you up to date:

• Real Estate Jargon-What It Really Means
• What Is Going On In The Etobicoke Real Estate Market Today?
• Is It a Good Time to Buy or Sell a Home in Etobicoke?

The Benefits of a VTB When Buying a House

There is no question that mortgage requirements are getting stricter due to rising real estate prices and other factors. Through no fault of their own, a buyer may find themselves pushed out of the market even if they can easily afford the monthly payments.

A VTB can make it easier for a buyer to finance their purchase, particularly if the seller agrees to more flexible terms. In addition, you can often close on your new home faster since you’re bypassing the traditional approval process, which can take a long time. If the market is competitive, this speed can be imperative to your ability to purchase the house you want.

Looking for more advice on buying a house in Etobicoke? You’ll find valuable insights in the posts below:

• Everything First Time Buyers Need to Know About Buying a House
• How Not To Overpay For Your New Home
• 10 Ways to Get Your Offer Accepted in Today’s Toronto Market

Proceed With Caution

If the thought of relying on your seller to provide financing sounds risky, there are good reasons for that. Since the usual rules do not apply, you’ll need to review the paperwork very carefully to be sure you know what you are agreeing to. Below are a few considerations to keep in mind.

• The seller might not finance 100% of your purchase. If you don’t have the funds to cover the rest, you may need to take out a traditional mortgage as well.
• VTB loans can have higher interest rates. This could make your home more expensive over the long term.
• If you run into financial difficulty and default on your mortgage, a traditional lender has a long process to follow before they can force a foreclosure, and will usually begin with a Power of Sale. A seller-financed purchase may offer fewer protections unless explicitly stated in the agreement.
• With careful planning and skillful negotiation, many of the risks associated with a VTB are within your control. What you cannot control is the vendor.
• You are relying on their financial stability to finance your home. However, what happens if they run into difficulty themselves? Can they call in their loan to cover their own expenses? Be sure you know before you sign.

Using VTB financing can be beneficial and help you secure the home of your dreams. You just want to proceed with eyes wide open and work with an experienced real estate agent and lawyer to protect your interests.

Every selling situation is unique. The posts below will help you with a seamless experience:

• What to Look For in a Real Estate Agent When Selling Your Home
• My House Didn’t Sell. Now What Should I Do?
• Advice For Seniors Selling Their Family Home

Why Offer a Vendor Take-Back Mortgage When Selling Your House?

When a buyer obtains a traditional mortgage, you receive full payment for your house upon your closing date, all up front, with very little risk of loss. Why would anyone consider taking on the risks of a VTB instead? There could be a few benefits to make it worth your while.

• Offering financing could increase your pool of buyers and fuel greater demand for your home. If enough people are interested and able to buy, it could even increase your final selling price and make your sale more profitable.
• The approval process could be faster, which means you can close on your transaction sooner.
• You don’t just earn money from your sale, but you also generate a steady flow of income through interest as the buyer repays their loan. This alone can more than account for any risks and drawbacks of financing the sale yourself.
• If the buyer does default on the loan, you could potentially initiate a foreclosure. This can be a lengthy and time-consuming process, but you can keep any interest income you’ve earned so far, plus you get your house back.

Of course, a buyer defaulting is never an ideal situation. The foreclosure process is not easy. Even if your claim is successful, you still have the stress of having to re-list your house again. However, the ability to reclaim your home at a potentially greater value is a powerful protection from any risks you have from offering seller financing.

If you decide to go this route, you’ll want to think like a bank and be sure that you vet your buyer carefully. All in all, it can be a flexible way to sell your house quickly and seamlessly, as long as both parties proceed with caution and under expert guidance.

Do you have a unique buying or selling challenge and want more in-depth advice? Our Etobicoke real estate agents are happy to help. Reach out today at 647-282-7653 or email contact@thompsonsells.com to learn more.