If homebuyers can’t qualify for a traditional mortgage loan, they can look up for a loan term, known as Purchase-Money Mortgage.
What is a Purchase-Money Mortgage?
A purchase-money mortgage is a type of a home loan issued to the buyer by a private funding resource as part of the purchase transaction. The homebuyer can get this purchase money loan from the seller of the property, from a bank, a private lender, or a credit union.
When the seller provides this loan to the buyer, it is called “Seller or Owner Financing”. This type of mortgage is usually utilized in cases where the buyer cannot get a loan through the traditional lending channels.
The reason a homebuyer may not qualify for a traditional mortgage varies. Sometimes the potential home buyers do not have enough money saved that is needed for a down payment. Or they do not have a solid credit score to get approved for a mortgage with reasonable terms.
What do you need to know about a purchase-money mortgage? – The Basics
A purchase money mortgage is unlike a traditional mortgage loan. Instead of obtaining the loan from a traditional lending channel, the buyer provides the seller with an agreed-upon down payment and gives a financing instrument as evidence for the loan.
These loans have very flexible eligibility requirements to facilitate the potential buyers who cannot get approved for a traditional loan. Most of the mortgage terms and eligibility requirements can be negotiated among the buyer and seller. These seller financing loans are particularly more useful when the seller and buyer know each other personally and are open to some major negotiations.
The security instrument for these loans is typically recorded in public records so that both the seller and buyer protect themselves in any future disputes.
Type of Purchase-Money Mortgage
1. Land Contracts
The land contracts between the seller and the buyer do not pass the legal title to the buyer immediately. Instead, the buyer gets the equitable title. The buyers make the payment to the seller for a decided period of time. These payments can either be monthly or every two weeks. After the final payment or a refinance, the buyer gets the deed.
2. Lease-purchase Agreement
A lease-purchase agreement means that the seller gives the buyer equitable title and also leases the property to the buyer. After the completion of the lease-purchase agreement, the buyer receives the credit and title for some or all of the rental payments towards the purchase price. Then, the buyer usually receives a loan for paying the seller.
Benefits of Purchase-money Mortgage for Buyers
Some of the advantages of the Purchase-money mortgage for the buyers are listed below
- Flexible underwriting guidelines
- Offers the highest LTV limits available
- Requires lower credit score
- Down payments are negotiable
- Buyers may choose any payment option
- Lower interest rates
- Buyers may close earlier that with a traditional mortgage
A purchase money mortgage has much flexible eligibility requirements than traditional mortgage loans. It offers the highest available LTV limits, has the most flexible underwriting guidelines, and the lowest credit score requirements. Moreover, these loans often come with rebates or other pricing incentives which means the interest rates are lower.
Another advantage of the purchase-money mortgage is that buyers can choose from any payment options such as balloon payments, interest-only, fixed-rate amortization, or less-than interest. Down payments are typically negotiable, and if the seller allows, the buyer can make multiple periodic lump sums based on their convenience. This will ultimately lower the interest rate further.
The closing costs for purchase-money mortgage loans are lower as well. As these loans usually do not require a lot of paperwork. The buyers usually close faster on their home loans and receive possession of their new home earlier than when dealing with a conventional loan.
Benefits of Purchase-money Mortgage for Sellers
The seller usually receives the full list price or even higher when they provide the purchase-money mortgage to the potential buyer. Sellers can negotiate the down payment, interest rate, monthly mortgage payments, and the length of the loan on their own terms.
This gives the seller a chance to pay less on taxes on an installment sale. Moreover, the sellers directly deal with the payments received from the buyer and often end up getting better financial advantages compared to a traditional sale.
Affiliated Mortgage is a trusted national Real Estate Search and Mortgage Broker. We have a team of experienced Real Estate Agents and Loan Officers who can make the process of homeownership really easy and affordable for our clients. Please visit our properties website that lists houses for sale in Rapid City and Sioux Falls.
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