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A purchase-money mortgage is a mortgage issued to the borrower by the seller of a home as part of the purchase transaction. Also known as a seller or owner financing, this is usually done in situations where the buyer cannot qualify for a mortgage through traditional lending channels. A purchase-money mortgage can be used when the buyer is assuming the seller's mortgage, and the difference between the balance on the assumed mortgage and the property's sales price is made up of seller financing.
A purchase-money mortgage is unlike a traditional mortgage. Rather than obtaining a mortgage through a bank, the buyer provides the seller with a down payment and gives a financing instrument as evidence of the loan. The security instrument is typically recorded in public records, protecting both parties from future disputes.
Whether the property has an existing mortgage is relevant only if the lender accelerates the loan upon sale due to an alienation clause. If the seller has a clear title, the buyer and seller agree on an interest rate, monthly payment, and loan term. The buyer pays the seller for the seller’s equity on an installment basis.
Land contracts do not pass legal title to the buyer but give the buyer equitable title. The buyer makes payments to the seller for a set time period. After the final payment or a refinance, the buyer receives the deed.
A lease-purchase agreement means the seller gives the buyer equitable title and leases the property to the buyer. After fulfilling the lease-purchase agreement, the buyer receives the title and credit for part or all of the rental payments toward the purchase price and then typically obtains a loan for paying the seller.
Even if the seller requests a credit report on the buyer, the seller’s criteria for the buyer’s qualifications are typically more flexible than those of conventional lenders. Buyers may choose payment options such as interest-only, fixed-rate amortization, less-than-interest, or balloon payment. Payments may mix or match, and interest rates may periodically adjust or remain constant, depending on a borrower’s needs and the seller’s discretion.
Down payments are negotiable. If a seller requests a larger down payment than the buyer possesses, the seller may let the buyer make periodic lump-sum payments toward a down payment. Closing costs are lower as well. Without an institutional lender, there are no loan or discount points or fees for origination, processing, administration or other categories lenders routinely charge. Also, because buyers are not waiting on lenders for financing, buyers may close faster and receive possession earlier than with a conventional loan.
The seller may receive full list price or higher for a home when providing a purchase-money mortgage. The seller may also pay less in taxes on an installment sale. Payments from the buyer may increase the seller’s monthly cash flow, providing spendable income. Sellers may also carry a higher interest rate than in a money market account or other low-risk investments.
A purchase-money mortgage is a loan issued by the seller to the buyer. The two parties agree on terms of the loan like interest rates, payment dates, and the length of the loan.
Yes, even though it's not a traditional mortgage, the purchase-money mortgage must be dated and recorded with the deed transferring to the buyer once the loan is paid in full.
Since the process does not go through a traditional mortgage lender, the buyer and the seller can decide whether or not to get an appraisal. Most experts recommend getting an appraisal to learn the home's value.
Although there are risks involved for both parties, a purchase-money mortgage is a viable option. Buyers struggling to qualify for a traditional mortgage can benefit from a purchase-money mortgage, and sellers may be able to close their homes faster. That said, you may want to discuss options with a financial advisor before committing to a purchase-money mortgage.