The vendor take back mortgage allows the seller of the home to lend money to the buyer for the purchase of their own property. The property has to be owned outright by the seller, meaning there can’t be a mortgage on the home at the time of selling.
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The vendor take back mortgage enables the seller of the property to become the lender for the buyer. The vendor take-back mortgage provides an option when traditional mortgage setups are not an option, or when the seller wishes to offer an incentive to a buyer. Although this might not sound like an ideal solution, there are some circumstances when both buyers and sellers might consider taking advantage of the vendor take-back mortgage.
The buyer is still required to make regular payments to the seller as they would with any other lender. The interest rate is set by the seller and agreed on by the buyer. However, it is generally at a higher interest rate than one would receive with a more traditional mortgage.
The amount of money provided to the buyer varies from enough to cover closing costs or transfer tax to more substantial amounts to cover the down payment or a portion of the mortgage.
Vendor take back mortgages have made their way back into the residential lending scene due to changes in the market and more stress put on buyers. It’s harder to acquire a mortgage because it’s harder to save for a down payment.
In order to get access to mortgages, buyers are looking for different ways to get their down payments. Both sellers and real estate agents have learned more about vendor take back mortgages and are able to present them to buyers as a viable option to help them buy their dream homes. In turn, it also helps sellers get their houses off the market.
The vendor take back mortgage is not the ideal lending situation for the average transaction. Instead, it’s used in specific situations where there are either market challenges for the seller or credit challenges for the buyer.
In both scenarios, the seller also has the added benefit of increased cash flow from the interest.
The vendor take back mortgage offers three main benefits to the seller:
For the buyer, the vendor take-back mortgage provides an additional type of financing option when you’re facing down payment or credit challenges.
As good as it sounds, the vendor take back mortgage does come with some warnings to sellers.
Depending on the vendor take back mortgage setup, you’re going to have two loans to pay back. Often, buyers are tempted by the vendor take back mortgage to help provide the down payment to secure a mortgage from a bank. In the case of a conventional mortgage, you pay the down payment, and the bank pays the balance. You then make mortgage payments for the balance.
In the case of a vendor take back mortgage, you might be given a portion or all of your down payment by the seller, you then pay the bank, and they transfer the funds to pay the balance of the purchase. You now have to begin paying back the seller for the down payment and the bank their mortgage payments.
You have to calculate these monthly payments based on the agreed-upon payment schedule and interest to make sure that when combined, you can afford the payment required.
This a tool used primarily for investors and commercial properties.
As with the house purchase example, for investors with poor credit, the vendor take back mortgage provides:
In conclusion, a vendor take back mortgage is not something the common home buyer or even seller probably has heard about. It is something that pops up a lot more in the real estate investment world, but in the right circumstances, it can prove beneficial to both buyers and sellers.
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For more information Contact Us Below:
Sean Findlay – Professional Realtor | Sales Representative
Local Hamilton, Stoney Creek, Grimsby & Niagara Real Estate Expert
CENTURY 21 Millennium Inc., Brokerage *
Office: 1 888-450-8301 | Fax: 905-450-6736
Stoney Creek Office Located: 280 Barton St, Stoney Creek, ON L8E 2K6 (by Appointment Only)
Toronto Office Located: 181 Queen St E Brampton, ON L6W 2B3 (by Appointment Only)
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