Tips, Advice, and Explanations from a Vancouver Mortgage Broker  

Posts Tagged ‘cash’

Vendor Take Back Mortgages – More Details…

Tuesday, November 9th, 2010

Transcript of Video Blog:

Hi, everyone, Rowan Smith with the Mortgage Centre. I want to talk today about vendor takeback mortgages. I’m getting a lot more inquiries no them, and there’s a fundamental misunderstanding out there about how they apply and whether or not you can really use them.

A lot of the no-money-down programs, Carlton Sheets and all these other guys that are out there, have been using vendor takeback mortgages. Those programs are predominantly American. Now the technique does work here, but it’s not as simple as people think.

What they’ll often say to me is, “Rowan, I want to buy a $400, 000 house. I don’t have the 5% down, so I want to take a vendor takeback for the 5%.” What that means is that the seller is loaning you the 5% down payment.

Sounds good. The only problem is, it’s not allowed. You can’t do it under Canadian banking systems, because to do 5% down, the person who’s got the first mortgage either has to get CMHC, Genworth, or Canada Guarantee in mortgage insurance, most commonly CMHC.

CMHC is not going to allow you to borrow 5% behind their 95% financing. Part of it’s just simple risk. Knowing that you have absolutely no money in the deal and have nothing to lose if you walk away doesn’t give them a lot of security that you’re going to make your payments.

But secondly, you end up borrowing more than the purchase price. And the reason is, when you pay, put 5% down, you’re going to be looking at a mortgage insurance premium through CMHC for Genworth or Canada Guarantee of anywhere between 2.75% and 3.35%, depending on what program you buy through.

So if you’re looking at 95% financing plus the additional funds for the premium, you’re up at 98% financing. Now you’re going to add your 5% that you’re getting from the vendor. So you’re up over 100% of financing. They’re simply not going to allow that.

And while the math may make good sense, or it may make sense to your realtor or advisor why you can do this, it’s realistically not going to happen in Canadian real estate. I’ve seen too many applications where people have tried to do a vendor takeback, and it’s really considered a dirty word in the industry at this point.

So if you’re thinking of a vendor takeback, the only time you can really do it are on commercial transactions or when you already have a very sizable chunk of money from a percentage standpoint, 20%-plus for example, and are looking to maybe top that up by borrowing a bit back from the vendor.

There are number of ways we can structure this, and I can help you do that. If you have any questions on vendor takebacks, please call me with your situation, let me go through it with you, and we’ll see if we can make it work.

For the Mortgage Centre, I’m Rowan Smith.

Vendor Take Back Mortgages – Take Back – 2nd Mortgages

Saturday, September 11th, 2010

Transcript of Video Blog:

Hi, everyone. I want to talk today about something — I haven’t done a blog post for quite a while — and that’s vendor take-back mortgages. What is a vendor take-back, and when does it apply?

A vendor take-back is essentially a situation when the vendor agrees to take back a mortgage in lieu of some cash. I’m going to give you a really clear basic example, but then I’m going to show you what everybody always wants and why it rarely works in Canada. It works in the United States quite smashingly, but it doesn’t work so great up here north of the border.

So, a vendor take-back: if you assumed that a guy wanted to buy a piece of property that was $400,000 but he didn’t really have a down payment, what he could do is go to that vendor and say, “Listen, what I’m going to do is I’m going to get $20,000 from someone over here. Will you carry the balance of the mortgage?” meaning, will you loan me the money and take the property as security?

Now not all sellers are going to be willing to do this. First off, they’re going to want an interest rate, probably higher than the bank’s, to make this worth their time. Secondly, they have to not need those dollars to go buy something else because they haven’t received them from you. You borrowed it from them.

That’s a standard vendor take-back situation. I’m dealing with a guy out in the country right now who bought a house with a massive shop on a huge piece of acreage. The banks didn’t want to finance it because the house is old and rundown, and he was buying it purely for an 8,000 or 10,000 square foot shop that was on it that was wired up for his business. For him, it made great sense.

The vendor was an old guy. The vendor agreed to lend him 100% of the purchase price. Great, he can do whatever he wants, but he’s got to pay that guy the interest. Eventually, as he accumulates money from running his business, he’s going to have to get a mortgage from somewhere to pay that guy out, because that guy’s going to eventually want the dollars.

But here’s the situation we run into frequently where people think a vendor take-back would work. They know they need to get 20% to buy a rental property, so what they say is, “Well, why don’t I put 10% that I have down, and then the vendor gives me 10%, and then we get the other 80% from the bank?”

The reality is that banks generally don’t go for this setup. They don’t want to see vendor take-backs, because if they do, they now have to factor in that payment and can the person afford the vendor take-back payment, the mortgage payment, plus any other debt payments.

If they can, great. Then there might be something we can do. But in the 10 years that I’ve been doing mortgages and banking, I’ve never seen that situation once. So you generally need 20% of your own equity before a vendor take-back becomes an option.

Now you say, “Look, I’ve got 20%. What do I need the vendor take-back for?” Still, 80% is still a pretty high amount of financing, and if your property’s unique or your situation’s difficult with credit or income, maybe you’re going to need 35%. So you’ve got 20; you need 35. Where’s the 15 come from?

That’s a circumstance where a vendor take-back might make sense, and it may be a situation where we can use it. But I need to look at the situation as a whole, because the property, the source of your down payment, and your income and credit all form a very integral piece of the puzzle, and we’ve got to look at that together.

From the Mortgage Centre, I’m Rowan Smith.