Purchase Money Mortgages
There are many different types of home loans on the market today, one of the options available are purchase money mortgages. This kind of mortgage is issued by the seller of the property to the buyer as part of the property transaction. You may sometimes see it referred to as owner financing or seller financing. This can be done in scenarios whereby the buyer is not able to secure a mortgage via conventional lending channels.
A purchase money mortgage can be utilized in scenarios whereby the purchaser assumes the seller’s mortgage, and the difference between the property’s sales price and the assumed mortgage is made up with owner financing.
So, if you are considering obtaining a purchase money second mortgage or you feel this could be ideal for you, continue reading to discover everything you need to know about this type of mortgage and what to expect from such a product.
How does a purchase money mortgage work?
A purchase money mortgage is not like a conventional mortgage. Instead of buying a mortgage via a bank, the purchaser will provide the seller with a down payment and get a personal second mortgage from the seller as a financing instrument, thus providing evidence of the loan for the total purchase of a property. The security instrument tends to be recorded in public records, which is for the purpose of protecting both parties from the prospect of disputes in the future.
Whether the property has a mortgage at present, it might be only relevant if the lender accelerates up the loan upon the sale because of an alienation clause. Should the seller have a clear title, the seller and buyer will agree on the loan term, monthly payment, and interest rate. The purchaser will pay the seller for the seller’s equity in installments in the form of a personal second mortgage, or a purchase money mortgage, also known as a seller held second mortgage.
A deeper look at purchase money mortgages
When you are receiving seller financing via any type of purchase money mortgage, it is typically because you may have found it difficult to qualify for financing somewhere else. Because of this, the seller may ask to be handsomely compensated to risk providing you a loan. They might want more in closing costs, a higher interest rate, or a higher down payment. This is not always the case, though. It depends on the seller.
The manner in which the title will work is going to depend on the sort of purchase money mortgage you agree to. Should it be a land contract, which we will give you more clarity on below, you will not receive the title immediately. Instead, you receive it once you have made the final payment. The legal form of how a purchase money mortgage is established is going to differ from state to state in the United States, so it is imperative to check the local laws for the correct forms and consult a lawyer should you have any queries about this.
What happens to current mortgages in a purchase money mortgage agreement?
If there is a current mortgage that is not going to be paid off by the seller or yourself either before or at the closing of the purchase money mortgage, then you need to consider other financing options, such as a conventional loan. You can-not just assume the seller’s payment on the current loan as this is not generally allowed. Instead, you should apply for a mortgage loan with MortgageQuote.com. However, you do need to be aware of a couple of things when it comes to this.
Firstly, you can not assume the other individual’s loan, you may end up making two payments at two different rates of interest. You need to make a payment on the current mortgage, yet there is a high chance the sales price will be greater than the existing mortgage. If this is the case, there is a separate agreement that needs to be made with the seller in terms of the interest rate and the term of the difference between the current mortgage balance and the purchase price.
Another thing you need to know about a purchase money mortgage is that should you plan to assume the current mortgage officially, you will need to qualify with the business that gave the initial mortgage. This means that there are going to need to be some qualifications that you will need to meet. This could be a good credit score, for instance, yet it will all depend on the mortgage provider in question. The issue ehre is that a lot of people who want to take out a purchase money mortgage are not able to qualify for a conventional mortgage, or they would have taken this out in the first place, so you do need to keep this in midn when determining whether or not it is right for you.
Why would a buyer consider a purchase money mortgage?
Now that you have a good understanding of what a purchase money mortgage is, it is worth exploring why a buyer would be interested in this type of mortgage. Even if the seller wants the buyer to provide a credit report, the criteria that a seller has in terms of the buyer’s qualifications are going to be much more flexible when compared with a traditional lender. This is something that may fall in your favor. Of course, it is all going to depend on the individual seller and what they are willing to accept on this front.
Purchasers may find that they are able to select from a range of different payment options if the seller is willing to offer them. Examples include balloon payments, less-than-interest payments, interest-only loans, and fixed-rate amortization. There are no hard and fast rules, as it all comes down to what is right for both the buyer and the seller. You may even be able to make a mix or match of payments based on what the seller is happy with. Interest rates may remain constant or they could adjust periodically, depending on the needs of the borrower and the discretion of the seller. Ultimately, there is going to be much more flexibility because you are dealing with an individual person rather than an institution.
You may also be able to negotiate the down payment. If the seller demands a bigger down payment than what the buyer is able to offer, the seller may be willing to allow the buyer to make lump-sum payments on a periodic basis toward the down payment. Closing costs are often lower as well. The reason for this is because you do not have an institutional lender, which means there are no discount or loan points, nor will there be any fees for administration, processing, or origination, which is something that conventional lenders will tend to charge. In addition to this, because you will not be waiting on a lender for financing, this can mean that you are able to close the sale of the property a lot quicker as well.
Why would a seller consider a purchase money mortgage?
You now know why buyers may be interested in purchase money mortgages but are there any benefits for the seller? A seller could be tempted by a purchase money mortgage because it may give them the ability to list their price at a higher rate. You may also find that you are able to pay lower taxes if you make an installment sale.
In addition to this, sellers receive spendable income in the form of the payments they receive from the buyer, which will boost their monthly cash flow. Furthermore, you could potentially carry a higher interest rate with this sort of investment when compared with others. Of course, this all depends on the way that you structure the purchase money mortgage and the terms you are willing to accept.
The different types of purchase money mortgages.
There are a number of different types of purchase money mortgages, and so it is important to consider all options carefully before you enter into an agreement like this.
When a buyer utilizes a purchase money mortgage, they basically work the deal out with the seller. Because this is a private mortgage, there are not a lot of requirements that the sellers or buyers need to meet, nor are there many regulations in place. It is all going to depend on the agreement you make with the other party.
Nevertheless, to help you get a better understanding of how purchase money mortgages tend to be structured, we will take a look at some of the most common types:
- Lease option agreement - This is a rental agrement whereby there is the option to purchase the property throughout the lease agreement or when the lease agreement expires. The seller and buyer will work out the details of the lease and the chance to purchase the property when they are negotiating the transaction. A lot of the lease agreements that fall into this category will use a percentage of the monthly rent towards the buyer’s down payment to buy the home. Should you decide that you are not going to exercise your right to purchase the property, you will then end up forfeiting the extra cash that you have paid every month towards the purchase.
- Land contract - Another option to consider is a land contract. A land contract is basically a mortgage that the seller provides. The seller and purchaser will agree on an amount for the down payment, payment frequency, and the interest rate. The person purchasing the property will pay the seller in agreed-upon amounts on the date that has been settled on. After the purchaser has paid off the mortgage, the seller will transfer the deeds to the buyer, and this is when the buyer will fully own the property.
- Hard money loans - Another option is a hard money loan, which is a loan that is granted from a private investor who focuses on the home itself instead of the qualifications of the borrower. The only issue with a hard money loan is that they have much higher interest rates and they are short-term. This can be a viable solution for buyers that do not have an ideal credit rating yet will fix their rating within the coming few years, enabling them to qualify for conventional financing to pay off their hard money loan. Of course, it is always wise to seek independent financial advice before you take out a loan like this.
- Assuming the mortgage from the seller - If the seller has a mortgage on the home that that is not going to be paid off before the purchaser takes possession, the buyer could assume the mortgage. What this means is that the person buying the property is going to simply take off the loan where the seller has left off, making the exact same payments and at identical rates. As the properties usually sell for more than the current mortgage amount, purchasers will have two mortgages, i.e. the purchase money mortgage and the assumable mortgage. These will tend to have different terms and interest rates. It is vital to note that purchasers are going to need to qualify with the lender in order to be able to take the mortgage over.
- Lease purchase agreement - Aside from the different options we have mentioned so far, there is also the possibility of a lease purchase agreement. This is also a type of rental agreement, yet there is the need to purchase the property before the lease’s term has come to an end. If you are not able to get a conventional mortgage at this point, it could prove the be difficult unless the seller is happy to provide you with seller financing.
Final words on purchase money mortgages
So there you have it: everything that you need to know about purchase money mortgages. We hope that the information we have provided you with above will have given you a better understanding of what a purchase money mortgage is and whether or not this is a viable option for you. It is important to remember that there is no right or wrong answer when it comes to taking out a mortgage; it is all about figuring out what is going to make the most sense for you.
Purchase Money Mortgage
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