The traditional real estate story is familiar to most people who have ever bought or sold a house. A homeowner lists a property, and a buyer places an offer. If both parties agree, it’s on to the next step for everyone.

However, not every transaction follows the usual path. There are obstacles and options that you may not know about. For example, what happens if your buyer won’t or can’t pursue the standard options to obtain financing?

You could consider a Vendor Take Back Mortgage where you become the lender. But should you? Let’s explore the risks and advantages of providing financing for your own buyer.

Thinking of selling your home? Getting an idea of its value in the current market is always a positive first step. Book your complimentary home evaluation here.

What Is a Vendor Take Back Mortgage?

A Vendor Take Back Mortgage (VTB Mortgage or VTB financing for short) happens when the seller provides some or all of the financing for the home. Other terms you may hear are “seller financing or a seller take-back mortgage.”

This can be a private arrangement or in cooperation with a traditional lender or mortgage broker. In any case, you will still need a real estate lawyer to legally register the mortgage.

Buying or selling real estate is unlike any other transaction due to the high dollar amounts involved. Financing is a highly complex legal process, even when you want to keep the banks out of it through a private arrangement.

(Speaking of legalities, we are not lawyers. We highly recommend obtaining professional legal advice when considering any form of seller financing. In the meantime, please consider this post for informational purposes only.)

Given that your home is likely your most valuable asset, it’s good to proceed with caution. This level of commitment demands a lot more protection than a scribbled “IOU” provides!

Financing in real estate can seem complex, but it is an essential component of buying or selling a home. You can get some valuable information in the posts below:

• What Is Bridge Financing and Do I Need It When Selling My House?
• What Happens When Your Mortgage Is Up for Renewal?
• How Mortgage Stress Tests Affect Home Sellers

Who Should Consider a Vendor Take Back Mortgage?

A Vendor Take Back Mortgage isn’t a possibility for every home seller. The ability to cover your buyer’s financing depends greatly on your own equity and access to capital. Keep in mind that few people have enough liquid funds available to cover the cost of real estate in today’s market.

Seller financing taps into your home equity to fund your buyer’s purchase. It can get financially and legally complicated if you still have an existing mortgage yourself. Most insured lenders do not allow VTB financing, so you will need to assess your documentation carefully. A Vendor Take Back sale may be possible if you have an uninsured or private loan, but you should disclose it to your lender.

Needless to say, you should be particularly careful about agreeing to finance a buyer’s purchase if your home is not fully paid off. The counsel of a real estate agent and lawyer are both essential to ensure you protect your own interests.

A Vendor Take Back Mortgage can work if your home is fully or mostly paid off. A significant amount of equity shields you from some of the risks associated with financing. Not that it’s ever ideal for a buyer to miss a payment or two. However, the situation is far less stressful when you have the funds to cover it.

Seller financing is also common when a homeowner sells their property to a family member or possibly a close friend. This is one way to help a younger buyer who can’t qualify for a traditional mortgage to get into the market as long as a certain amount of trust is involved. You’ll also want a contingency plan to protect your investment (and your relationship) if things don’t go as planned.

Pros and Cons of Vendor Take-Back Mortgages

Providing seller financing can offer several benefits even when you’re not helping a family member purchase your home. It can also open up your pool of buyers, giving you an advantage in a down market when people may be hesitant to make a commitment. Other pros of VTB financing include:

The potential to earn interest income. Every payment from your buyer covers the principal and interest, just as it would with traditional financing. This gives you a chance to fully leverage the value of your house as time goes by.

The possibility of deferring Capital Gains. When selling a second home, the primary residence exemption doesn’t apply. In this case, you would have to add 50% of any profit you earn to your total taxable income for that year. Dividing the total amount owing over several years can make your payment far less burdensome than a single lump sum.

Before agreeing to lend the funds to buy your home, it’s also important to understand the risks and downsides. There is always a chance that your buyer defaults on their loan and can’t cover their payments. This can put your own financial health in jeopardy as you will have to cover the funds out of your own pocket.

Even an ethical buyer with the best of intentions can run into the unexpected. When offering seller financing, you should be fully aware of all potential risks and have a backup plan in case the worst happens.

Selling a home is highly nuanced and every situation is different. You’ll get some insights as to how to navigate the market in the posts below:

• 8 Important Things to Remember When Selling Your Home
• How to Sell Your House Fast
• Why Home Sellers Need to Think More Like Buyers

How Does a Vendor Take Back Work?

You might think that the rules are less stringent when providing Vendor Take Back financing. However, clear documentation is essential, and all terms of the agreement must align with the Canadian Interest Act.

Vendor Take Back mortgage rates are another point of negotiation. As the seller and lender, you can charge a higher or lower rate or even offer 0% financing depending on the situation. Whatever you and your buyer agree on becomes legally binding once both signatures are on the Agreement of Purchase and Sale and the lawyer has registered the Mortgage Agreement. When going in with all of the information, seller financing can be a valuable tool to streamline the transaction.

Do you have a challenging home selling situation and want some personalized advice? Our top agents in Hamilton & Burlington can guide you through anything. Reach out today with any questions you have, or call 905-332-9223 to connect with our office.