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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
What is a Purchase Money Mortgage?
A mortgage provided to the borrower by the seller of a home in the course of the purchase transaction is termed as a purchase money mortgage.
It is also called seller or owner financing, in situations when the buyer cannot qualify for a mortgage through traditional lending channels this purchase-money mortgage is done.
This mortgage can be used when the buyer is taking over the seller’s mortgage, and the seller finances the difference between the balance on the assumed mortgage and the market price of the property.
More About the Purchase-Money Mortgage
A purchase-money mortgage is different from a traditional mortgage. Instead of securing a mortgage through a bank, the buyer provides the seller with a down payment and gives a financing instrument as confirmation of the loan.
To protect both parties from future disputes, the security instrument is recorded in public records.
When the lender expedites the loan upon sale due to an alienation clause only then it is relevant to know if the property has an existing mortgage or not.
When the seller has a clear title, the buyer and seller come to a consensus on the interest rate, monthly payment, and loan term. The buyer pays the seller on an installment basis for the seller’s equity.
Different Types of Purchase-Money Mortgages
Even if land contracts do not pass legal title to the buyer, yet it gives equitable title to the buyer.
The seller is made payment for a set time period by the buyer. The buyer receives the deed after he makes the final payment or refinances.
With a lease-purchase agreement, the seller gives the buyer equitable title and leases the property.
The buyer receives the title and credit for part or all of the rental payments toward the purchase price after he fulfills the lease-purchase agreement, and then he obtains a loan for paying the seller.
Advantages of Purchase-Money Mortgage for (buyers)
Even if the seller wants the buyer’s credit report, the indicator for the buyer’s eligibility is more flexible than those by the conventional lenders.
For payment options, buyers may choose from interest-only, fixed-rate amortization, less-than-interest, or a balloon payment.
Based upon a borrower’s needs and seller’s discretion the buyers may mix or match the payments, also the interest rates may periodically adjust or remain constant.
The buyer can negotiate down payments. If the buyer is unable to manage a larger down payment that the seller quotes, then the seller may allow the buyer to make periodic lump-sum payments toward the down payment.
Closing costs are also lower. Since this is minus an institutional lender, the buyer doesn’t need to pay for the loan or discount points or origination, processing, administration, or other fees, which lenders usually charge.
Unlike the conventional loan, buyers are not dependent on lenders for financing, resulting in closing the deal faster and receive possession much earlier.
Advantages of Purchase-Money Mortgage for (sellers)
When providing a purchase-money mortgage for a home, the seller may receive full list price or higher. On an installment sale the seller may also pay less in taxes.
Payments made by the buyer could increase the seller’s monthly cash flow, and provide spendable income. Compared to a money market account or other low-risk investments the sellers may also carry a higher interest rate.
Conclusion
Compared to traditional bank mortgages the purchase money mortgages have higher interest rates.
These mortgages are often used by buyers who do not have enough savings to cover a traditional down payment, or by those who have poor credit and cannot get a large enough bank mortgage.
Under the terms of the contract for deed, the buyer is given possession of the property and equitable title to the property, but the legal title is held by the seller and the seller is primarily liable for payment of any underlying mortgage.
