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This process voids the need for banks and a mortgage. However, in order for the seller to be able to enter into this agreement, they must own the home outright.
Before you decide to go the route of a vendor take back mortgage, there are some things you should know. While these types of mortgages are great for some, they may not be the best situation for everyone. Here are some details regarding borrowing money this way.
Pros and Cons of a Vendor Take Back Mortgage
When it comes to vender take back mortgages, there are advantages and disadvantages. Depending on your financial situation, one of these may outweigh the other.
Pros
When it comes to VTB mortgages, those who are unable to get traditional mortgages have more access to financing. They also allow sellers to process a sale that might not otherwise go through. VTB’s can also be combined with traditional mortgages to allow for larger purchases.
Another advantage of a VTB mortgage is that it can be advantageous to those selling in a buyers market. Buyers markets can be very difficult for sellers due to the abundance of buyers, but offering an alternative to a traditional mortgage can make it easier to sell their home.
Not only can VTB mortgages for those who sell residential properties, they’re also good for those who sell commercial properties, investment properties or even a rental property. It allows the new owner to assume the property and the seller to defer capital gains while being able to generate extra income. This means the seller has an extra few years before the property is technically sold and they have to pay the capital gains tax.
Cons
Along with the many positives for both buyers and sellers with VTB mortgages, there are also disadvantages. The main one being that interest rates are higher with VTB mortgages than they are with traditional mortgages. This is because the seller is taking a lot of risk when it comes to providing this type of mortgage since there’s always a chance the buyer defaults. Depending on the type of deal that's made, the buyer may have two separate loans to pay meaning they have to pay the primary mortgage lender as well as the regular payments to the sellers. .
Unlike a traditional sale, lenders don’t get the full amount of money up front. This means that the seller is going to receive the bulk of the funds over time which can tie up their money. Since these types of mortgages are usually for those who have a hard time qualifying for a traditional mortgage, the risk of not receiving your money is greater.
How VTB Financing Works
With VTB financing, the seller is both the seller and the lender. This means that most of the money from the buyer will be received by the seller over time instead of upfront like a traditional sale.
Because this type of sale isn’t regulated like it would with traditional lenders, it’s also important that the contracts are clear and you have a lawyer negotiate for you.
There are a few different ways that vendor take back financing can be done. The seller can mortgage the whole property or they can mortgage part of it. In the case where they mortgage all of it, the sellers and buyers will negotiate a down payment as well as a payment schedule.
However you can’t take over the seller’s mortgage, they can only do this if they no longer have a mortgage.
When it comes to the seller offering a partial vendor take back mortgage, this can be done as a way for the buyer to afford the down payment to the bank or in order to get the full financing for the property. If the seller provides a partial VTB then the buyer will have to make their mortgage payments as well as their VTB payments.
No matter the reason the VTB is given, though, the seller will need to provide payment as well as receive payment.
VTB Mortgage Rates
Unlike traditional mortgage rates, vendor take back mortgages aren’t regulated. The rate that is used for this type of mortgage is negotiated between the buyer and the seller. Once it’s been negotiated then it will be added to the sale agreement. However, with that in mind, the interest rates are usually higher than the market rate.
VTB Mortgages in Different Provinces
In Canada, there are very few regulations when it comes to vendor take back mortgages. This is because they’re more of an agreement between a buyer and a seller than they are a mortgage. For this reason, there aren’t many differences from province to province.
In provinces like BC, Alberta and Ontario your lawyer will be able to tell you if there are any rules you need to follow.
How VTB Benefits the Buyer
While VTB is beneficial to both the buyer and the seller, the buyer will usually enter into a VTB agreement if they’re unable to qualify for traditional financing. With this type of mortgage the interest rate is up to the seller, but the buyer is able to purchase the home even if they don’t qualify.
Depending on the agreement that is made between the buyer and the seller, the buyer may be able to make a smaller down payment or take a larger mortgage than the bank determined financing limit. The payments that are to be made to the VTB are also negotiable.
Even though this can end up being the more expensive option when it comes to purchasing a home, it can also allow buyers who wouldn’t be able to afford a home otherwise.
Differences Between a VTB and a Mortgage
There are quite a few differences between a VTB mortgage and a traditional mortgage. Traditional mortgages have to go through traditional channels. The buyer must apply through a mortgage broker or a bank and see if there’s mortgage lenders that’s willing to work with them. From there, the buyer is given an interest rate and has to decide whether or not to accept the mortgage loan. Once the buyer has the mortgage, it will have to be renewed with a new interest rate at the time once the mortgage term ends.
A VTB mortgage has less restrictions. The agreement is made strictly between the buyer and the seller, usually using lawyers. The interest rates aren’t based on market conditions since the money isn’t coming from a bank. However, the only way a seller can offer a VTB is if they own their home outright.
Differences Between a VTB and an Agreement for Sale
Both VTB mortgages and agreement for sale involve deals where the buyer purchases the home with seller financing. The difference between these two deals is that the buyer obtains the deed to the home with a VTB depending on the agreement, but the agreement for sale allows the seller to keep their name on the property.
With VTB’s, though, the loan is essentially considered to be a secured loan just like a traditional loan would be. The seller will put a lien on the property which will stay there until the buyer pays the sales price in full. If the buyer has another mortgage on the purchase property with another financial institution or other mortgage lender, then the VTB will be considered a second mortgage.
In Canada, VTB agreements are more common than agreements for sales. That said, the buyers usually prefer agreements for sale because it offers them more protection than VTBs. In a lot of ways, agreements for sale are a lot like rent to own where VTB mortgages are the buyers purchasing the home while receiving some or all of their financing from the seller.
VTB Business Sale
Vendor take back mortgages can be used for residential properties, but they’re more commonly used for the sale of a business. In this case, the current owner is lending funds to the buyer in order for them to start their business.
The reason the VTB mortgages tend to be more common for businesses than they are for personal mortgages, is because it can be much more difficult to get a business loan or business financing. The current owner and new owner will draw up an agreement that works best for both parties.
VTB Agreement
While agreements for vendor take back mortgages will differ depending on the buyers and sellers, the template for these agreements will be similar. It will state the names of both the buyer and seller.
It also states the full purchase price of the property, what the property is being purchased for and how the buyer makes payments to the seller and when. The loan terms, full loan amount, monthly payments and mortgage debt with other lenders.
This agreement will also dictate how much equity in the property the seller retains and when the buyer will hold full ownership. The interest rate that the buyer is paying the seller will also be specified in this agreement along with any other stipulations that were agreed upon which should also cover closing costs.
Should You Use A VTB Mortgage?
While a VTB isn’t for everyone, it is a good option for those who have a bad credit history, credit challenges or even poor credit. It’s a different process than a financial institution providing a conventional mortgage, but if it’s the only way to enter the housing market then it may be worth it.
It is important to consider the fact that these mortgages have higher interest rates. They are also usually fixed rate mortgages and you don’t renew the mortgage every few years. This fixed interest rate will be in effect until the house purchase is paid in full.
Overview
In Canada, there are many different alternatives to a traditional mortgage in order to purchase a home. One of these ways is with a vendor take back mortgage which is a common alternative to b lenders.
These types of mortgages allow the buyer to purchase a home from the seller without having to get a mortgage through the banks, or to get a larger mortgage than the banks will give them. It also allows the seller to sell their home faster, especially in a buyers market.
Vendor take back mortgages can be used for residential property as well as for businesses. They’re actually a very common way for business owners to sell their business since getting business financing is much more difficult than personal financing. With all that in mind, though, this type of financing isn’t for everyone.
Before you enter into any agreement, make sure that you get a lawyer to look at the agreement to get professional advice and to ensure that it’s in the best interest of both parties.
