Non-traditional mortgage options are becoming more popular these days following mortgage insurance and qualification changes. Implemented by the federal government, these changes have made it increasingly difficult for many Canadians to buy a home, particularly first-time homebuyers.
One such option is a vendor take-back mortgage (VTB). With this solution, the seller extends a loan directly to the buyer. A VTB provides buyers with funds they may not otherwise have access to in order to purchase the home and allows sellers to secure the sale of their home by lending the money needed for the purchase.
While the loan size varies based on specific needs, it’s possible to end up with a larger amount with a VTB than a bank is willing to provide. The interest rate, established by the seller, could be higher than a traditional loan in order to offset any inherent risks. However, it will most likely be lower than if the money was obtained through other means such as a private mortgage.
Qualifying for a VTB mortgage is generally easier than through traditional funding, less cumbersome in terms of paperwork, fees and time, and typically allows for greater negotiating flexibility.
If you’ve already been to a traditional lender, you know about stress test requirements, which may negatively impact your ability to obtain financing. Perhaps you’re having difficulty saving enough of a down payment, or you have blemished credit or limited credit history and you’ve been turned away? A VTB mortgage provides you with an alternative financing option to make purchasing your home a reality.
A VTB mortgage may also be appealing if you’re looking to buy a home that requires substantial renovations as not all lenders are comfortable financing this type of property or, if they are, they’ll charge a higher-than-normal interest rate.
The loan you obtain from the seller can also be used to supplement any approved financing you were able to secure through a traditional lender. This is only applicable for financing where you have 20% or more down and only “B” or Alternative lenders will allow a VTB to be held in second position (a second mortgage) behind the first mortgage they’ve provided. What this means is you could get 65% financing from a “B” lender and 15% VTB or whichever mix that adds up to 80%.
A VTB mortgage (sometimes referred to as a seller take back mortgage) can be beneficial to both buyer and seller. Generally, you’ll find that it’s a win-win situation. As with any complex financial decision, however, it’s always best to consult with your mortgage broker for guidance and advice.
Have questions about whether a VTB mortgage makes sense for you? Answers are a call or email away.
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