A “vendor mortgage” is sometimes referred to as a “vendor-back” or “vendor take-back” mortgage. Here, the vendor encourages the sale of the property by giving the purchaser a loan on the purchase of the property. For example, if the purchaser is able to get 75 per cent conventional financing but does not have sufficient funds for a down payment of 25 per cent, the vendor may be prepared to give a second mortgage for 15 per cent of the purchase price. That way, the purchaser would only need to come up with a 10 per cent down payment. The purchaser would then make mortgage payments to the vendor as if a normal commercial lender held the second mortgage.
If you are the purchaser, it is fairly common for the vendor not to make any credit check or any other financial assessment of you. On the other hand, if you are the vendor you should make sure that there is a provision outlined in the offer to purchase that allows you to do a thorough credit check of the purchaser before deciding on granting the second mortgage.
Sometimes the vendor makes arrangements through a mortgage broker for the second mortgage to be sold at a discount as soon as the transaction is completed. This way, the vendor gets cash immediately–minus, of course, the cost required to discount the mortgage and the broker’s fee. Generally the mortgage has to have a fixed–not variable–rate if it is to be sold, the terms should be at least a year to be attractive to a purchaser of the mortgage, and the mortgage is generally closed with a penalty for early payment and not assumable.
If the vendor intends to sell the vendor-back mortgage, there is normally a precondition in it that the purchaser will cooperate with any credit checks and will agree to the mortgage being assigned. In addition, that acceptance of the offer to purchase is based on a commitment from a mortgage broker that there is a purchaser for the second mortgage as soon as the sale is completed.
If you are considering providing a vendor mortgage, it is important to be cautious and obtain legal advice in advance. There is a risk that the purchaser will refuse to pay on the second mortgage if there appears to be any problem with the condition of the property after the sale.
Naturally, the vendor or the assignee of the vendor’s second mortgage could commence foreclosure or order for sale proceedings, but in practical terms it is possible that the purchaser could attempt to raise a defence. Discussion of these types of problems in detail is outside the scope of this article. They are raised merely to alert you of the need for competent legal advice in these unique situations.
