What is a vendor take back mortgage?

Definition of Vendor Take-Back Mortgage

A vendor take-back mortgage is a type of financing where the seller offers to lend the buyer the money so that the buyer can purchase the property. Unlike a wrap-around or all-inclusive mortgage, a vendor take-back mortgage is quite often a secondary mortgage loan, as most buyers will have a primary source of funding other than the seller.

Why is this term important?

A vendor take-back mortgage is typically more common in the purchase of commercial properties, although they have been used in the purchase of residential homes when mortgage rates were closer to 20%. A VTB can also entail the seller covering one or more of your closing costs such as land transfer tax, appraisal, survey or application fees.

Known as a VTB, these loans are often used by buyers to help pay for extraneous costs, such as land transfer tax, appraisal or survey fees or application fees required for redevelopment. Even when the VTB is to help with the purchase price of a property, the benefits to the buyer is that qualifying for a VTB is a matter of negotiating with the seller, rather than having to qualify with a lender.

A VTB is particularly helpful if the buyer's financing application was declined by a traditional mortgage lender. If the seller is still motivated, they could offer a VTB to help close the deal.

Examples of term

While there are many reasons why seller-arranged financing may be attractive to a buyer, one good example is the purchase of a distressed property. The idea may be to improve or renovate the property, for a profit, but lenders may be reluctant to offer you a mortgage loan on a property requiring extensive work. Instead, many distressed property buyers will finance the purchase using a combination of a VTB, a line of credit, and savings. Then, once the property is substantially renovated, you may seek conventional mortgage financing.