Purchase Money Second Mortgages

Renting vs buying, this is a much debated thought for most families, however, more times than not the hard part of buying a home can be coming up with the down payment for the mortgage, this is where a Purchase Money Second Mortgage comes into consideration and may be the answer for you. Purchase money second loans are similar to standard purchase money mortgages. One major difference is one is a second mortgage lien position, and the other is in first lien position.

A purchase money mortgage occurs when the buyer obtains a mortgage from the seller of the subject property. The seller may use this strategy as a way to help sell the property, or perhaps the buyer lacks credit or cash down payment. These types of loans may also be referred to as private loans. MortgageQuote.com works with clients in these situations, see if you qualify for the first mortgage by applying for a free rate quote.

The Purchase Money Second Mortgage is a loan that simultaneously closes with a first mortgage along with your down payment. For instance, if you want to purchase a home borrowing 90% and the lender approves you for 80% Loan To Value, or the house’s appraised value. This means you will need 10% more to complete the transaction and make up the difference. This is also called a seller held second mortgage, or a Piggyback. This may be a unique strategy to help avoid paying PMI. PMI is generally paid by the buyer on any loans that lends out greater than 80% LTV. Other strategies include obtaining seller concessions for use of closing costs, and some loan programs even allow gift funds from family and others.

What is a Purchase Second?

When buying a $300,000 home, the first lien position loan generally has the larger loan amount. As an example, the first lien would be $240,000 or 80% LTV. The second is in a less superior position on title, you might have $30,000 or 10% LTV. The first and second-lien positions now add up to 90% LTV, which means you need to make up the difference of the remaining $30,000 or 10% LTV. Meaning by not borrowing over 80% LTV for your first, you avoid PMI.

How Does it Work?

If you were to ever default on the property, the first lien position holds the superior position on title. This means if the bank were to sell your property, the first lien position would have the ability to recoup their losses. The second-lien position would have to wait to see if the sale of the property will have enough excess funds to satisfy the first lien position in order for it to be paid. This second position inherits risk, they may not recoup any money if the property went into default. There are certain items that could leapfrog the all lien positions, including the first, such as past due taxes.

The Rule of Thumb

There are several options, but two of the most common are purchase money seconds, and standard second loans. What is the difference? Purchase money seconds comes from the seller. However, the lending institution finances the standard seconds.

For a standard second , if you secure funding from the same lender as your first loan, there’s very little you must do. After you apply for the loan, the lender has most of everything else they need. They’ll process your application using the same income, asset, and credit information you provided for the first loan.

At the closing, you’ll close on two loans rather than one. This just means signing two sets of closing documents and agreeing to take two liens on your home rather than one. If you sell the home, you must pay off both loans in order to release the liens on your property and transfer homeownership.

What are the Terms?

Like your first, the purchase money second has varying terms depending on the lender. Lenders may offer various terms, but usually they are shorter than the first loan. Secondsoften offer a secure fixed interest rate and most don’t have a prepayment penalty so you’re free to pay off the loan whenever you want.

Utilizing a second initially might free up your cash initially, but keep in mind that second generally hold a higher note rate. Make sure to set a plan to either consolidate the loan or pay it off by making extra payments throughout its term. Penalties or fees associated with your loan may occur, make sure to be prudent and do your due diligence.

Purchase Money Second Mortgage

What are the Benefits?

Avoiding PMI, as the PMI charge may be greater than the cost of a second. Therefore, a first lien that allows you to borrow 90% may be more expensive than an 80% first and a 10% second at a higher note rate.

In Addition, if a seller is motivated, but perhaps the lender is capping the loan to 80%, along with your 10% down, or a total of 90% CLTV (80%+10%) or complete loan to value, the seller may be motivated to use a purchase money second (PMSM) to help seal the deal. The interest on the PMSM may be tax deductible, you should consult your CPA to confirm.

Are there Downsides?

When reviewing the benefits and features of a product, one must always recognize there is almost a downside. One of the downsides might be you may pay a higher rate of interest due to the risk factors involved. Equity in the subject property is used as collateral in a cash refinance. In Addition, Purchase Money Second loans generally inherit all the risks as any other standard loan as well.

Purchase Money Second is private and may not report to the credit bureaus. This could mean that any payments you make, you will not receive credit for paying them on your credit profile. Due to this, obtaining a loan history may prove to be more difficult to obtain. Second liens call for a higher note rate than first lien positions. Therefore, the interest you pay can be significant over the life of the loan. A private loan may not be as regulated, therefore the terms may be less favorable. This means the terms of the loan may not be as favorable as you would like. Prior to obtaining the loan, seek the advice of an attorney, CPA and other real estate professionals. These are just a few of the many downside risks, make sure to do due diligence up front.

Alternative Types

Besides the Purchase Second, there are other options. Assistance may help for your down payment. The state of Florida may have options that may fit your needs.

The various programs from State Housing Initiatives Partnership (SHIP) may be of interest to you.

Non-repayable grants

Zero-interest loans

Deferred second mortgages

These programs are a part of a few ways that can help you get into a home.

Home equity line of credit: This is another second that pulls on your home equity, only this time it’s a line of credit, like a credit card. You don’t have to draw funds out initially. You can leave the funds untouched in the credit line. When you need the funds, you may use them, paying interest only on the loan you withdrew, not on the entire line.

PMI and a Second Liens

Each borrower has different circumstances. In some cases, it may be better to pay PMI rather than obtaining a Purchase Money Second. Loan insurance may go away once, however, a second will not. How quickly will you owe less than 80 percent of the home’s value? If you have enough to put down that you get close to the 80 percent threshold, you may want to stick with the first lien and PMI. You may request that the lender drops PMI, this is up to the lender.

How long will you live in the home? If you aren’t making a large down payment, think about how long you’ll be in the home. Is it worth avoiding PMI by taking out a second? Remember, you will pay closing costs and interest. If this is your ‘forever home’? Consider this because you may benefit during tax season rather than paying toward PMI, of course consult your CPA. Will you pay the loan down faster or make the minimum payments? If you make minimum payments, you may not eliminate PMI any faster and may benefit more from the second lien. If you make larger payments, though, you may request to drop PMI faster.

In Conclusion

The second purchase is one of the ways to help avoid paying PMI. Many borrowers don’t want to pay more and that’s okay. Using a second loan is an acceptable way to get around it.

If you borrow 80% LTV on the home to avoid PMI, then this may cost you less in the long run. You can always consider refinancing the property if the value goes up later on. A great way to do this is by first calculating mortgage payoff then estimate your home value and see if you have 20% equity.

Look at the big picture to see what suits your situation. No two situations are alike and there isn’t one solution that’s a one-size-fits-all. MortgageQuote.com can connect and discuss with you to go over your options. But ultimately you will need to figure out your bottom line, your financial goals, and what will leave you with the best outcome not only on your monthly payment but for the overall cost of the loan.