What Is a Purchase-Money Mortgage?
A purchase-money mortgage is a mortgage issued to the borrower by the seller as part of the home purchase transaction. Known as seller or owner financing, this approach is often used when the buyer cannot qualify for a mortgage through traditional lending routes. This type of mortgage becomes essential when the buyer is assuming the seller’s mortgage, covering the difference with seller financing.
The Basics of a Purchase-Money Mortgage
Different from traditional mortgages, a purchase-money mortgage involves the buyer providing the seller with a down payment and a financing instrument as proof of the loan. This security instrument is recorded in public records to protect both parties from future disputes. If the property has an existing mortgage, its relevance only comes into play if the lender accelerates the loan upon sale due to an alienation clause. If the seller holds a clear title, the buyer and seller agree on an interest rate, monthly payment, and loan term. The buyer then pays the seller’s equity in installments.
Types of Purchase-Money Mortgages
- Land Contracts: Legal title is not immediately passed to the buyer, but equitable title is given. The buyer makes payments to the seller for a set period. After the final payment or refinance, the buyer receives the deed.
- Lease-Purchase Agreements: The seller provides equitable title and leases the property to the buyer. After fulfilling the lease-purchase terms, the buyer gets the title and credit toward the purchase price from rental payments and typically obtains a loan to pay the seller.
Purchase-Money Mortgage Benefits for Buyers
Even if the seller requests a credit report, their criteria for the buyer are usually more flexible than those of conventional lenders. Buyers might choose from diverse payment options, including interest-only, fixed-rate amortization, less-than-interest, or a balloon payment. Payments and interest rates may be mixed and matched based on needs and negotiations.
Down payments are also negotiable. If a seller’s larger down payment request exceeds the buyer’s immediate funds, periodic lump-sum payments can be arranged. Closing costs are reduced as there are no institutional lender fees, and transactions are accelerated, enabling quicker possession.
Purchase-Money Mortgage Benefits for Sellers
Sellers may secure the full list price or even higher when offering a purchase-money mortgage. There is also a tax advantage of receiving payments as part of an installment sale. Monthly payments enhance the seller’s cash flow, yielding immediate spendable income. Additionally, sellers may earn a higher interest rate compared to conventional savings or low-risk investments.
Related Terms: owner financing, seller financing, land contracts, lease-purchase agreement, balloon payment, fixed-rate amortization
References
- Rocket Mortgage. “Land Contracts: What They Are and How They Work”.
- Rocket Mortgage. “Lease Purchase Agreement: What You Should Know”.
- Internal Revenue Service. “Topic No. 705 Installment Sales”.
