Browse Proptionary encyclopedia

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Purchase-Money Mortgage

DEFINITION

The borrower is issued a purchase-money mortgage from the seller of a house in part of the transaction process. Another way that a purchase-money mortgage is known is as owner or seller financing. When traditional lending channels are not an option for a mortgage for a buyer, a purchase-money mortgage is an option that may work.  When a buyer takes on the seller’s mortgage, seller financing is made up of the sale price and the balance’s difference.

EXPLANATION

Unlike a normal mortgage, the mortgage is not obtained through a bank; the purchaser gives the owner a down payment which is evident of the loan. Which is how a typical mortgage would work.

Depending on whether there is an existing mortgage, it is pertinent only if the loan is accelerated due to an alienation clause. The seller and buyer will need to make an agreement on the interest rate, loan term, or monthly payment. The seller will be paid by the buyer for the equity of the seller.

Different Types of Purchase-Money Mortgages

The buyer is given equitable title; it does not pass the legal title. The seller receives payments from the buyer for a time period that is set. The buyer will receive the deed when the final payment has been made, or a refinance is what happens for a land contract.

For a lease-purchase agreement, the buyer is given equitable title by the seller, and the seller then will lease the property to the buyer. When the lease agreement has been fulfilled, the title is given to the buyer as well as the credit of all or part of the rental agreement going for the price of the purchase price as well as getting the loan needed to pay the seller.

Benefits for Buyers with Purchase-Money Mortgages

There are several benefits for buyers with purchase-money mortgages. If a seller asks of a credit report from a buyer, the criteria for the qualifications of the buyer from the seller are generally more lax than that of traditional lenders. A buyer has a variety of payment options to choose from such as a balloon payment, interest only, less-than interest, or fixed-rate amortization. These types of payments can be mixed and matched, and sometimes the interest rates can either remain as constant or adjust at random, based on the need from the borrower and the discretion of the seller.

Negotiable down payments are typical with purchase-money mortgages. When a buyer has a seller that is requesting a down payment amount that is more than the buyer can afford, a seller can allow the buyer to make lump-sum payments. The closing costs are typically lower with purchase-money mortgages. Since there is not an institutional lender, there are not any processing, discount points, fees for origination, or various other things lenders charge. Buyers that are not waiting for financing from lenders may receive faster closing and possession with purchase-money mortgages than with other loans.

Benefits for Sellers with Purchase-Money Mortgages

There are benefits for sellers when it comes to purchase-money mortgages. When a purchase-money mortgage is involved, the seller can receive a higher price or full listing price for their home. The seller’s taxes may also be lower for a sale that is made in installments. The buyer’s payments can increase the seller’s cash flow monthly, offering them an income that is readily spendable. The interest rate is higher than the money market account or other similar lower risk investments for sellers.

So as you can see, there are a lot of various benefits for both buyers and sellers with purchase-money mortgages.

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