What would you do if the dream house you have always wanted is up for sale, but your home loan falls significantly short of the seller’s asking price? You may try to negotiate to lower the asking price or ask the seller to give you a purchase money mortgage.
What is a Purchase Money Mortgage?
A purchase money mortgage is a loan that a property seller gives to the home buyer as part of the transaction. A purchase money mortgage is also called “seller financing” since it is the seller that assumes a bank’s role in issuing a loan to the buyer.
A purchase money mortgage is not like a traditional mortgage because banks are not involved in the transaction. Instead, the property seller and buyer will reach an agreement about the terms of the loan, including the amount, the interest rate, and the length of repayment. With a purchase money mortgage, the buyer gives the seller a down payment on the property and will issue a legally binding document to prove their agreement.
What are the Benefits of a Purchase Money Mortgage?
If the purchase money mortgage were written properly, the property buyer and the seller would benefit both.
Benefits for Buyers. A buyer with not enough funds to pay the asking price may still purchase the property through a purchase money mortgage. Likewise, buyers denied a home loan from a bank may still negotiate with a property sells for a financing scheme through this purchase money loan. During the negotiations for the purchase money loan, the buyer may choose from different payment options such as interest-only, fixed-rate amortization, or balloon payments. Since there is no bank involved in this type of transaction, the buyer can negotiate for a lower down payment or opt to pay periodic lump sums toward the down payment. Likewise, the property buyer may choose to pay in full the remaining mortgage amount without paying for closing costs and will not have to wait until the term of the loan has expired or fulfilled.
Benefit for Sellers. Property sellers will also benefit from a purchase money mortgage. Sellers may receive the full asking price or higher because of the interest rates that they will put in the purchase money mortgage. Likewise, the seller may pay lesser taxes because the sale is on installment. Moreover, property sellers may benefit from the buyer’s installment payments because it provides them with spendable monthly income.
In a Purchase Money Mortgage, the property seller and the buyer draw up the terms of the loan
When Do Buyers Get to Own the Property?
Buyers who opt for a purchase money mortgage will not get the title of the property beforehand. The seller will sign over the property’s title to the buyer once the final payments for the purchase money mortgage have been made. On the other hand, if your purchase money mortgage agreement is a lease-purchase one, the buyer will receive an equitable title to the property. However, the buyer will need to buy the title at the end of the lease agreement to assume full ownership.
