A purchase money mortgage, which is a mortgage that the seller of the home issues to the borrower as part of the transaction, is also known as a seller’s mortgage. This is also known as seller financing. It is used when the buyer cannot get a traditional mortgage. In situations where the buyer assumes the seller’s mortgage, a purchase-money mortgage is possible. The difference between the assumed mortgage balance and the sale price of the property can be made up of seller funding.
The basics of a Purchase Money mortgage
A purchase-money mortgage differs from a traditional mortgage. Instead of obtaining a mortgage through the bank, the buyer gives the seller a down payment. The financing instrument is used as proof of the loan. Both parties are protected from potential disputes by having the security instrument recorded in public records.
Only a lender who accelerates the loan upon the sale of the property due to an alienation clause will need to know if there is an existing mortgage on the property. The seller must have clear title before the buyer can agree to an interest rate, monthly payments, and loan term. On an installment basis, the buyer pays the seller for seller’s equity.
Different types of purchase money mortgages
Land Contract don’t give legal title to the buyer, but the buyer gets equitable title. The seller is responsible for making payments for a specified time. The buyer makes payments to the seller for a set period.
A lease-purchase agreement is when the seller grants the buyer an equitable title and leases the property. The seller gives the buyer equitable title and leases the property to him after he fulfills the lease-purchase agreement.
Buyers get Purchase Money mortgage benefits
The seller may request a credit report from the buyer. However, their criteria are usually more flexible than traditional lenders. Buyers have the option of choosing from interest-only, fixed rate amortization, less than-interest, or a balloon payments. You can mix and match payments. Interest rates may adjust or stay constant depending on the borrower’s needs.
All down payments can be negotiated. A seller may request a higher down payment than what the buyer has. In this case, the seller might allow the buyer to make lump-sum payments towards a down payment. Also, closing costs are less. There are no fees or discounts, or loan or discount points, for origination, processing or administration. Buyers don’t have to wait for lenders to finance their purchase, so they can close quicker and get possession sooner than with conventional loans.
Sellers get Purchase Money mortgage benefits
If a buyer-money mortgage is used, the seller might receive a higher price than the list price for a home. A seller might receive less taxes if they are able to provide a purchase-money mortgage. 3 Buyer payments may increase the seller’s monthly cash flow and create a source of income. Sellers might also have a higher interest rate that those who invest in money market accounts or low-risk investments.
