What is a purchase price mortgage?
A purchase price 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 mortgage on the purchase price can be used in situations where the buyer assumes the seller’s mortgage, and the difference between the balance of the assumed mortgage and the sale price of the property is financing from the seller.
The Basics of a Buy Money Mortgage
A purchase price mortgage is different from a traditional mortgage. Rather than getting a mortgage through a bank, the buyer provides the seller with a down payment and gives a financing instrument as proof of the loan. The security instrument is usually registered in a public archive, protecting both parties from future litigation.
Whether the property has an existing mortgage is only relevant if the lender is accelerating the loan upon sale due to an alienation clause. If the seller has clear title, the buyer and seller agree on an interest rate, monthly payment, and loan term. Buyer pays Seller for Seller’s Equity on an installment basis.
Types of purchase money mortgages
Land contracts do not transfer legal title to the purchaser but give them equitable title. The buyer makes payments to the seller for a fixed period of time. After the final payment or a refinance, the buyer receives the deed.
A lease-purchase agreement means that the seller gives the buyer fair title and leases the property to the buyer. After completing the lease-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.
Purchase Money Mortgage Advantages for Buyers
Even if the seller asks for 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, fixed rate amortization, lower interest, or a lump sum payment. Payments may mix or match, and interest rates may periodically adjust or remain constant, depending on the needs of the borrower and the discretion of the seller.
Deposits are negotiable. If a seller requests a larger down payment than the buyer has, the seller may let the buyer make periodic lump sum payments for a down payment. Closing costs are also lower. Without an institutional lender, there are no lending or discount points or fees for origination, processing, administration, or other categories that lenders regularly charge. Plus, because buyers aren’t waiting on lenders for financing, buyers can close faster and receive possession sooner than with a conventional loan.
Buy Money Mortgage Benefits for Sellers
The seller may receive the full list price or more for a home when they mortgage the purchase price. The seller may also pay less tax on an installment sale. The buyer’s payments can increase the seller’s monthly cash flow, providing them with disposable income. Sellers may also have a higher interest rate than in a money market account or other low risk investments.
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