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What Is a Vendor Take-Back Mortgage?

Autumn Rivers
Autumn Rivers

When a home buyer cannot afford the entire purchase price of a property, the seller may help by offering a vendor take-back mortgage. This means the buyer obtains from the seller some of the money to pay for the house, though he usually gets the bulk of the money from a bank. This type of arrangement can be beneficial to a buyer because it may allow him to buy a house that costs more than he currently has, and it is sometimes easier to obtain financing from sellers because they do not always require the same documentation that banks do. A vendor take-back mortgage also can benefit the seller in that it can increase his chances of selling the property quickly without having to lower the price, even if it is not in great shape. In many cases, both buyers and sellers are advised to consult with a real estate attorney prior to choosing this somewhat uncommon method of financing.

A buyer who finds a property that is slightly out of his price range may be interested in obtaining a vendor take-back mortgage. This means he likely will obtain the majority of the funding from a traditional lender, and the seller will take on a second mortgage for the balance of the cost. The buyer will then pay the seller back for the smaller mortgage while also making payments to the bank for the main loan. While some buyers opt for this type of financing because the house they want is just out of their price range, others choose it just so they can keep more of their money in their pocket. In addition, some sellers are not as strict as banks are when it comes to proving income and credit scores, which may help some buyers qualify for the loan.

Man climbing a rope
Man climbing a rope

This type of mortgage also can benefit sellers, with the most obvious advantage being that they frequently can sell the house faster because it will appeal to more buyers. At the same time, they do not have to lower the price of the home to attract buyers who cannot afford the cost upfront. This may be especially helpful when selling a house that needs to be fixed up or trying to find buyers for a home that is more expensive than the average house on the market. In addition, some sellers set the interest rate of the vendor take-back mortgage higher than the bank would, so they may make extra money, if the buyer agrees to it.

On the other hand, a vendor take-back mortgage can be considered risky for both sellers and buyers. For example, the buyer may be faced with repayment terms that are stricter than the bank would offer and a higher interest rate than he would get elsewhere. The seller also faces risks, because there is a chance that the buyer will default on the loan, in which case the seller's credit may be ruined unless he pays back the mortgage himself. This is why a vendor take-back mortgage is not particularly common and is most often entered into only when the buyer and seller feel they can trust each other. It often is advised that a real estate lawyer look over such a contract before it is signed.

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