Seller Take Back Mortgage

Paul CachiaWhat is a Seller Take Back Mortgage?

It is a mortgage provided by the seller to the buyer and is also referred to as a vendor take back mortgage, vtb mortgage, vtb, vendor financing and owner financing.

The seller (vendor) of a property, rather than a financial institution, is willing to provide some or all of the mortgage financing to the buyer. In Canada this process is generally more common on commercial properties than residential.

These creative home finance mortgages can be classified as private mortgages from private lenders.

Why would a seller offer to hold a mortgage against the property?

-the property is distressed and it makes it more desirable
-the seller is willing to help with the purchase
-the seller charges a higher than market value rate
-it provides steady cash flow over time to the seller
-there is the ability to defer some capital gains

Why would a buyer consider accepting a mortgage held by the seller?

-the buyer is unable to obtain financing from their bank
-the buyer doesn't have the capital to close
-the buyer can use the money to renovate/update
-the buyer would otherwise not be able to be a home owner
-generally there is no pre-payment penalty
-the mortgage will not show up on your credit score
-the rate offered by the seller is very competitive

Disadvantages for the Seller:

-less capital available for immediate use
-if it's a 2nd mortgage and the buyer defaults

If the seller is financing the entire property then the mortgage is secured by the property itself. In the event of a default, the title would return to the seller.

If the seller is financing as a second (2nd) mortgage for the buyer, the institution holding the primary (1st) mortgage will generally have secured the property. In the event of default by the buyer, the seller would have to proceed through the courts to obtain a settlement. This is time consuming and can be costly.

Are there clauses that should be included in the Agreement of Purchase and Sale?

Definately! Some clauses that should be considered depending on if you're the seller or the buyer are:

-a Seller Take Back Mortgage clause
-a Due on Sale clause
-a clause to prevent over financing by the Buyer
-a clause to allow the seller to sell the mortgage
-a post dated cheque clause
-a prepayment privilege clause
-a clause if the buyer sells, assigns or transfers title
-the seller has the right to cure any defaults
-the seller has foreclose rights if payments are in default
-conditional upon lawyers approval clause

For buyers it never hurts to ask if a seller is willing to participate in creative financing. Real Estate purchased using other people's money is leverage. As long as neither party is overextending itself it can be advantageous to both parties involved.

Buyers and sellers should ensure their real estate lawyers thoroughly review all documentation including the Agreement of Purchase and Sale, the mortgage clauses and all conditions prior to committing.

Click The Mortgage Centre to go to my official mortgage website or call me direct at 416-508-7035.

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