What is a purchase money mortgage?
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 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 in situations where the buyer assumes the seller’s mortgage, and the difference between the hypothetical mortgage balance and the sale price of the property is made up by the seller’s financing .
The basics of a mortgage at purchase price
A cash purchase mortgage is different from a traditional mortgage. Rather than obtain a mortgage through a bank, the buyer gives the seller a down payment and gives a financing instrument as proof of the loan. The security instrument is generally registered in public archives, protecting both parties from future litigation.
The question of whether the property has an existing mortgage is only relevant if the lender accelerates the loan for sale due to a disposition clause. If the seller has a clear title, the buyer and seller agree on an interest rate, a monthly payment, and a loan term. The buyer pays the seller the seller’s equity in installments.
Types of Purchasing Money Mortgages
Land contracts do not confer legal title on the buyer but give him a fair title. The buyer makes payments to the seller for a defined period of time. After the final payment or refinancing, the buyer receives the deed.
A hire purchase agreement means that the seller gives the buyer a fair title and rents the property to the buyer. After completing the hire purchase agreement, the buyer receives title and credit for some or all of the rents toward the purchase price, and then usually obtains a loan to pay the seller.
Purchasing Cash Mortgage Benefits for Buyers
Even if the seller requests a credit report on the buyer, the seller’s criteria for buyer qualifications are generally more flexible than those of conventional lenders. Buyers can choose from payment options such as interest only amortization, a fixed rate, a lower interest rate, or a balloon payment. Payments can mix or match, and interest rates can periodically adjust or remain constant, depending on the borrower’s needs and the seller’s discretion.
Deposits are negotiable. If a seller requests a larger deposit than he has, the seller can let the buyer make periodic lump sum payments for a deposit. Closing costs are also lower. Without an institutional lender, there are no loan or discount points or fees for lending, processing, administration or other categories that lenders charge regularly. In addition, since buyers do not wait for a lender to obtain financing, buyers can close more quickly and receive possession sooner than with a conventional loan.
Buying Cash Mortgage Benefits for Sellers
The seller can receive the full list price or more for a house when he offers a mortgage in purchase money. The seller can also pay less tax on an installment sale. Buyer’s payments can increase the seller’s monthly cash flow, providing usable income. Sellers can also carry a higher interest rate than in a money market account or other low risk investment.