By: Brown Nutan

What is a Vendor Take Back Mortgage?

A vendor take back mortgage is a type of financing arrangement that allows the seller of a property to lend money to the buyer for purchasing the property. It works like a traditional mortgage, but instead of a financial institution, the seller provides the financing, and the buyer makes regular payments over a specified period. The seller must own the property outright, without an existing mortgage on it.


Vendor take back mortgages can be a viable option for buyers who don't qualify for traditional financing or sellers looking for additional income streams from their property sale. They are generally used in specific cases where there are market or credit challenges. In a buyer's market, where there is high inventory and competition, a seller can offer funding to a buyer who might not have access to the funds required to make an offer. They can also benefit buyers with poor credit who might not be able to secure financing through traditional means.


Sellers can sell their home faster, generate extra income from the interest, and reduce taxes on capital gains with a vendor take back mortgage. Buyers can use it as an additional financing option when facing challenges with down payments or credit history. 


However, sellers must be aware that this type of mortgage is like a second mortgage, and they could be faced with a buyer unwilling or unable to make their mortgage payments. Buyers must also calculate monthly payments based on the agreed-upon payment schedule and interest to ensure they can afford the required payment when combined.


Vendor take back mortgages are primarily used for investors and commercial properties. Sellers who own investment properties outright can face hefty capital gains taxes when selling, and can allow them to defer capital gains from the purchase price, resulting in tax benefits.


Vendor take back mortgages can be a viable option for buyers and sellers facing market or credit challenges. However, both parties must be aware of the risks involved and work with an experienced lawyer to draw up an agreement to protect against loan defaults.