Second Mortgage

If you are in Canada, and don’t know what “Vendor Take Back Mortgage” is? Well, here is an explanation.

The seller “takes back a mortgage,” or finances the purchase of the property he/she is selling, by accepting principal-and-interest payments over a period of time, instead of being paid the lump sum in full on Day One. No bank is involved, since the seller him/her self is doing the financing; “being the bank.”

The buyer draws up a Contract For Deed, a Promissory Note, and a Mortgage, three separate documents, signs them and gets signature notarized, and the seller signs them and gets signature notarized. The execution of this type of agreement merely starts the process; the seller gets only a down-payment on Day One!

The deed to the property passes to the buyer (at what is called the “Closing”) only once the entire note is paid off in full as agreed. The term can be thirty years (very rare), five years, or one year (more common), or whatever buyer (mortgagor) and seller (mortgagee) agree upon.

Vendor is synonymous with seller. A “purchase money mortgage” is the more commonly acceptable term for an arrangement like this. It is also called a “land contract.” In western Pennsylvania, in my experience, they call it an “articles of agreement.” The big disadvantage to the BUYER, is that there is nothing, really, except the seller’s own good character, to keep the seller from selling the property in this manner to multiple buyers.

The buyer may protect him/herself by having their documents RECORDED as soon as possible after Day One — whosesoever documents bear the earlier date, in a case of such a conflict of interest between two would-be buyers, get the property. In a seller’s market, typically the seller will agree to such a thing only if they are extremely motivated to sell now and must get some cash out of their property, and are willing to deal with the uncertainty of “being the bank.”

 Financing for a term of one year or so, allows the buyer a little time to fix his/her credit rating and pay the seller off in full at the end of the term, usually by being qualified for a conventional bank loan to refinance it.

You cannot ever get a real estate agent/salesperson/broker to help you in this type of arrangement, since they always want to be paid their commission “right now,” meaning when they render their services, and the closing takes place a year or more later. That is, unless you, as buyer, are willing and able to pay that commission up front (reducing your available down-payment money).