Purchase Money Mortgage - Explained
What is a Purchase Money Mortgage?
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Table of ContentsWhat is a Purchase-Money Mortgage?How Does a Purchase-Money Mortgage Work?Types of Purchase-Money MortgagesPurchase-Money Mortgage Benefits for BuyersPurchase-Money Mortgage Benefits for Sellers
What is a Purchase-Money Mortgage?
A purchase-money mortgage is often used in real estate transactions, it is when a seller or homeowner finances a borrower as part of the agreement reached in the agreement. A purchase-money mortgage is a form of seller/owner-financing in the areal estate contract. In this type of financing, the seller of the home issues a loan to the buyer as part of the purchase transaction. In a seller financing, the seller of a property plays the role of a traditional bank by extending loans to borrowers or home buyers. A purchase-money mortgage is an agreement reached between a seller of a home and a buyer when the buyer does not qualify for a traditional loan.
How Does a Purchase-Money Mortgage Work?
In a mortgage transaction, several homebuyers require extra financing to purchase their dream homes, most buyers turn to traditional lenders for extra funds or support, however, not all home buyers qualify for a traditional loan, depending on their credit history and other factors. A buyer who does not qualify for a traditional loan can seek financing through a purchase-money mortgage. In this type of financing, the seller of a home assumes the role of a traditional lender and allows the buyer assume the mortgage through extra financing issued. The buyer, however, makes a down payment as evidence of the agreement. In a purchase-money mortgage, the buyer and the seller agree on the payment schedule, interest rate and other terms of the loan.
Types of Purchase-Money Mortgages
A purchase-money mortgage can occur in land contracts and lease-purchase agreements between buyers and sellers. When used in these transactions, a purchase-money mortgage performs different functions. For instance, in a land contract, the seller of a piece of land does not pass the legal title to the buyer under the purchase-money mortgage, rather, the buyer enjoys an equitable title based on the seller financing. The legal title is passed to the buyer after the final payment has been made in accordance with the terms of the contract. In a lease-purchase agreement, however, the seller of the property leases the property to the buyer, the buyer only receives the title after fulfilling the purchase agreement.
Purchase-Money Mortgage Benefits for Buyers
There are many benefits that buyers enjoy from purchase-money agreements, the most significant benefits include the following;
- A buyer accesses a loan through seller financing which he otherwise might not have qualified for in a traditional loan arrangement.
- The requirements for a purchase-money mortgage are more flexible than those of traditional lenders.
- Buyers are required to make down payments that are negotiable in seller financing.
- The closing costs in a purchase-money agreement lower, so also is the interest rate.
- In a purchase-money agreement, a buyer may repay the loan faster and possess the title faster.
Purchase-Money Mortgage Benefits for Sellers
Not only do buyers benefit enormously from a purchase-money agreement, but sellers also benefit wherewithal. For a seller, taxes payable on a sale are reduced and can be paid in installments as the seller receives payment from the buyer of the home. A seller in a purchase-money agreement can have a higher interest rate which means more cash flow from the buyer.