A purchase-money mortgage is another way to buy a home with financing coming from the seller. The seller basically provides the “purchase money” to the buyer by way of a mortgage. For sellers, it helps them sell their property at a good price or without delay. For buyers, it is an alternative route to tap standard mortgage financing they might have a hard time qualifying for.
Purchase-Money Mortgage vs Purchase Mortgage
For their names and purposes, the purchase-money mortgage can get easily confused with the standard purchase mortgage. Each has a set of unique features and characteristics:
- Lender: The institutional lender is the source of financing on purchase mortgages while on purchase-money mortgages, the seller acts as the institutional lender. The seller, given he/she owns the title free and clear of liens, will lay down the interest rate, monthly payment, and term of the loan.
- Terms: Between a traditional lender and a seller, the latter can be more lax and flexible when negotiating the terms of the mortgage. The seller may charge a lower interest rate, he/she may also accept a lower down payment. Closing costs can also be kept low with the absence of origination, processing and other fees associated with the traditional mortgage. Relatedly, the buyer does not have to pay discount points and other prepaid interest to the seller lender.
- Closing: Free of regulations that bound institutional mortgages, a purchase-money mortgage has a quick closing time.
- Priority: The seller will hold a promissory note for the repayment of the mortgage and as a lien on the home. This lien ensures that the purchase-money mortgage will be repaid from the proceeds of the home upon a liquidation, being second in priority to a mortgage made by an institutional lender.
A Win-Win Situation for Buyers and Sellers
There could be a lot of reasons behind a seller’s decision to provide the mortgage financing to the buyer. In situations where the supply of homes exceeds the demand for such, providing seller financing is a sure bet to sell it quickly and at a good price if more people bid for it. Another motivation of the seller is a job relocation, divorce, or desire to buy another property.
By selling the home on an installment basis, the seller would be paying less in taxes. And he/she holds a guarantee that the loan will be repaid in the form of the promissory note.
Should the buyer neglect on his/her obligations, the seller as a lien holder can enforce his/her right to the property. As in the case of land contracts, a type of purchase-only mortgages, the title will remain with the seller until the buyer fully pays off the loan.
The buyer also benefits from a purchase-money mortgage. He/she does not need to obtain financing from commercial banks, which may be difficult to secure because of credit issues, etc.
In the midst of income and credit vetting, the buyer might receive less financing from an institutional lender. But with an owner financing, the buyer has better chances at borrowing more at loan terms that can be negotiated.
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.
