Vendor take-back mortgage
|Vendor take-back mortgage|
|Methods and techniques|
Vendor Take-Back Mortgage is a sort of mortgage where a person who wants to buy a property does not have enough funds to cover payment for example a house and he borrows money from the seller of that particular property. From that financing through a loan benefits both buyer and seller. Vendor take-back mortgage gives buyer ability to acquire property that he would not be able to buy without a loan, meanwhile the seller can get rid of property from his books. Vendor take-back mortgage is one of its kind. It gives seller opportunity to extend a loan to the future buyer to have this property's sale secured. In most case scenario buyer have a source of funding thanks to financial institutions, when that funding is not enough the vendor take-back mortgage is commonly usually a second security on the property. Thanks to that fact, seller holds rights in the property, what is more he also owns a percentage equal to the amount due on loan. Not only seller can faster sale the property but also get some income through the interest being paid with the loan. Dual ownership continues until the time that buyer pays off the amount plus interest. This kind of securitization gives guarantee to the seller that the loan will be paid off. If contract will be breached and specified provisions in the contract will be made, seller might take possession of property if the loan is not repaid.
Comparison: Vendor Take-Back Mortgage & Traditional Mortgage
Traditional Mortgage or simply “mortgage” is a specified debt instrument, it is securitized by collateral of specified real estate property. Borrower is obliged to pay back the amount of money he borrowed enlarged by interests. Mortgage contract has to include all parties that participates, payment terms, details about the loan. Mortgage is an easy way if you want to buy an expensive property and you do not want to pay the entire value up front. The fixed-rate mortgage gives stability to borrower, the same interest is being paid until the debt is paid off. The very first interest payment is the same as the last one, so even if the market rates rises, the borrower's interest will not be struck by it.
In many cases, traditional mortgage goes alongside with vendor take-back mortgage. Home buyer pledges their house to the financial institution as a collateral for the loan. Bank can take over the ownership of property and sell it to clear the mortgage debt. This happens in case of a foreclosure.
Benefits of Vendor Take-Back Mortgage
Both, buyer as well as the seller benefit from this time of mortgage, here are some examples:
- Additional way of collateral
- Buyer can lower his own contribution by taking mentioned loan
- Thanks to installments buyer is able to buy more expensive property
- Real estate agent can increase his income through interest
- Aalbers, M. B. (2016). The financialization of home and the mortgage market crisis. In The Financialization of Housing (p. 40-63). Routledge.
- Courchane, M. J., Surette, B. J., & Zorn, P. M. (2004). Subprime borrowers: Mortgage transitions and outcomes. The Journal of Real Estate Finance and Economics
- Reilly, J.W. (2000). The Language of Real Estate, Dearborn Real Estate.
- Schmudde, D.A. (2004). A Practical Guide to Mortgages and Liens, ALI-ABA.
Author: Grzegorz Szewczyk