A vendor take back mortgage is a form of seller financing that may be an option when a buyer does not want or cannot qualify for a full traditional mortgage. Their debt-to-income ratio may be too high, they may not have saved enough for a down payment, or the purchase price of the property may be higher than the appraisal value. In cases like these, some sellers might offer the buyer a vendor take back mortgage.
Let’s take a look at how a vendor take back mortgage works, whether you’d want one or want to offer one, and how it compares to traditional mortgages.
Definition and Examples of Vendor Take Back Mortgages
A vendor take back mortgage is a type of mortgage in which the buyer receives a loan from the seller for some or all of the purchase price of the property. This is an alternative to traditional financing and may be appropriate for a range of situations, including when:
- The buyer cannot (or doesn’t want to) qualify for full financing from the bank
- The buyer cannot fully fund the purchase by the desired closing date
- The seller wants to spread capital gains on the sale over a number of years to reduce taxes
- The seller wants to lock in the sale or ensure the property sells on schedule
With this strategy, a seller who owns their home outright gives the buyer a mortgage and maintains a percentage of interest in the property until the mortgage is paid off.
For example, a buyer may want to buy a home that costs $400,000 but can only get approved for a $300,000 traditional mortgage. If the seller is eager to sell their home and believes the buyer will faithfully make payments, they may offer the buyer a vendor take back mortgage for the difference.
- Alternate names: seller take back mortgage, seller take back financing
How Vendor Take Back Mortgages Work
Take back mortgages can benefit both the buyer and the seller.
Considerations for Buyers
Let’s say you’ve just found a house you want to buy. You’d like to put in an offer, but your bank is unwilling to approve you for a mortgage. After looking around, you realize that other banks are also not interested in lending you the amount you need, perhaps due to poor credit history or insufficient income.
But fortunately, you have a stable job with a stable income. So you approach the seller—who owns the house outright—and ask whether they’d be interested in giving you a vendor take back mortgage. If they agree, they’d act as your lender. You’d make payments to them, and they’d receive interest on the loan like a typical bank.
However, you might have higher monthly payments and a higher interest rate relative to a traditional mortgage, depending on the negotiated terms. Plus, just like traditional lenders, the seller can foreclose on the property if you don’t make payments on the loan or meet other contractual obligations.
Considerations for Sellers
A take back mortgage can be advantageous for a seller, but you need to own the home outright. If you do, and you want to offer a take back mortgage, you can collect interest and principal payments, which could be worth much more over time than receiving a lump sum amount for your home. However, in offering a take back mortgage, you risk the buyer defaulting on payments. Plus, you forgo cash upfront to buy a new home.
Sellers offering a take back mortgage can spread out the receipt of proceeds from the sale over a number of years, which could reduce capital gain taxes.
Considerations for Both Parties
Buyers and sellers may have lower closing costs than they would with traditional lenders, and they may see a faster closing process and more flexibility concerning the size of the down payment.
Keep in mind that the amount of a vendor take back mortgage can be for all or some of the purchase price. If a buyer is able to obtain some traditional financing but can’t cover the entire amount, a seller who owns their home outright can offer a vendor take back mortgage for the difference.
Vendor take back mortgages offer more flexibility than traditional financing because the buyer and seller can negotiate the terms.
Vendor Take Back Mortgages vs. Traditional Mortgages
Vendor take back mortgages and traditional mortgages vary in several different ways:
|Traditional Mortgage||Vendor Take Back Mortgage|
|Financier||Banks, credit unions||Seller|
|Interest rates||Vary according to credit score and federal reserve rates, among other factors||Flexible according to seller and buyer’s agreement, but typically higher than traditional mortgage rates|
|Terms||Variable—generally for 15, 20, or 30 years||Chosen by the two parties, whether it’s a bridge loan or long-term financing|
|Qualifications||Must meet specific requirements, including income, debt-to-income ratio, and credit score.||Vary according to the seller's desires.|
The key difference between a vendor take back mortgage and a traditional mortgage is that the agreement on a vendor take back mortgage is between the buyer and the seller. This allows for significant flexibility, especially when it comes to term length, interest rates, and qualifications.
Vendor take back mortgages can be especially helpful for self-employed individuals, those whose credit needs repairing, or when the appraisal price comes in lower than the purchase price.
- A vendor take back mortgage may be a flexible financial option available in certain situations.
- To offer a vendor take back mortgage, a seller must own their home or property outright, with no mortgage due.
- The seller acts as a bank and signs a mortgage with the buyer to make payments on an agreed-upon amount for a specified term.
- A buyer who cannot obtain traditional financing may be able to qualify for a vendor take back mortgage.