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This article spotlights a Seller Take-Back Mortgage. That is when a seller is in a position to offer to hold the mortgage for the buyer.
When is this Alternative Possible? Here are 7 Situations.
- Possibly the seller is eager to sell but interest is low due to market conditions;
- It can be entertained when a property is less desirable;
- Qualifying for a mortgage is difficult due to mortgage restrictions, increasing rates and/or high home prices;
- Because of an abundance of inventory it can help to make a home more attractive to buyers;
- Lenders will not mortgage certain properties;
- VTB mortgages are offered by people entering retirement and looking for an additional income source.
- Considered by people selling that have a lot of equity in an investment property and don’t necessarily need the money to buy another property.
Offer a rate somewhat lower than current bank rates to create buyer interest and affordability.
Ways to Protect Your Mortgage and so Mitigate Risk
The buyer’s down payment should be at least 20% to 30% of the purchase price to diminish the seller’s risk.
Obtain a credit check on the buyer and their employment information.
You might give a mortgage with a one-year term but be prepared to extend if needed. Even after a year the buyer might still be unable to obtain a mortgage from an institutional lender.
Make the mortgage open so the buyer can prepay all or part of the principal without penalty; and make any partial prepayment coincide with the amortization schedule of the mortgage. That way there is no confusion as to the principal outstanding.
Have the buyer provide Title Insurance for the lender that protects your mortgage against what’s called a priority lien for money owed to the Canada Revenue Agency.
If the buyer is a corporation, obtain a personal guarantee from the director(s) of the corporation.
Make sure the mortgage is not assumable. In the event that the buyer sells the property you will get paid out on closing.
All of these mortgage provisions and more can be added to the mortgage commitment. If a 2nd mortgage is sought, understand that the 1st mortgage company would have to approve that.
