Creative Solutions: the Vendor Take-Back Loan

Here's a cautionary real estate tale that involves a condo corporation with low reserve funds, a firm purchase offer with no financing conditions and a creative vendor take-back (VTB) solution that may have saved the deal.

In this case, the buyer fell in love with the condo and chose to fend off a competing offer by going in firm without a financing condition. His deposit was submitted and the offer was accepted. Unfortunately, the buyer needed an insured mortgage, but quickly learned that CMHC and Genworth wouldn't insure any condos in that building due to reserve fund issues.

To save the deal, the vendor put forward a vendor take-back mortgage solution whereby the seller offered to loan the buyer 10% of the purchase price in order to bring the downpayment to 20% and remove mortgage insurance from the equation. For the VTB to work, the following would be required:

• The seller had to own the property outright
  
• The buyer would have to secure a conventional mortgage of 80% of the purchase price from a financial institution amenable to these arrangements or through a private lender. The VTB would be registered against the property but would be treated as a second mortgage.
  
• Through lawyers, both VTB parties agree on an interest rate (usually higher than the going rate) and terms for the loan. In many cases, there are no penalties for paying off the mortgage early.

Vendor Take-Backs Have Built-in Risks The risks of getting involved in a VTB mortgage may outweigh the benefits. There is risk the borrower may default on the loan. There is risk of having to pay back the borrowed funds before expected in the case of death. The legal agreement needs to cover all your bases. A wise borrow will work with a mortgage professional to consider the many alternatives to a VTB, including the following:

• Find a co-signer
  
• Find a guarantor who will guarantee that payments are made but have no claim on the property. Some lenders will not permit guarantors.
  
• Invest the time and energy to rebuild your credit
  
• Build a larger down payment from savings or borrow from family
  
• If traditional mortgage funding is not an option, a private lender may be the answer

Talk to a mortgage professional to find a solution that works for you.

In the cautionary tale above, the VTB wasn't entertained as a viable option. The buyer did not want a loan from a seller who did not have the integrity to disclose that the building had issues and financing would likely be a problem. Legal action is underway to end the deal and return the deposit. His next deal will involve more due diligence and a financing condition.

---

Susan Williams is a mortgage agent in Toronto with Mortgage Architects. For help you with all your mortgage and refinancing needs, email her at susan.williams@mortgagearchitects.ca.