If you can’t secure a mortgage the traditional way from a bank, don’t assume that you are out of luck. There’s one more way you might be able to buy a home and that’s with a purchase money mortgage. This mortgage doesn’t come from a bank. Instead, it comes from the seller himself.
You may have heard of this program called seller financing; they are one in the same. The seller becomes the bank in this situation and lends you the money. You reciprocate by agreeing to make payments in a specific amount on a specific date, just as you would do with a bank.
Keep reading to learn how the process works.
A purchase money mortgage works much the same way as a regular mortgage, the difference is who provides the financing. The buyer gives the seller a down payment and then the seller provides the financing in exchange for a security instrument, such as a deed.
In other words, the seller becomes the bank. The seller makes the rules. There isn’t a specific down payment, credit score, or LTV you need to follow. The seller decides what he wants. This can offer you some flexibility if you don’t qualify for traditional financing.
You both agree on a term, interest rate, and payment date. You then make payments to the seller as you would the buyer. The seller has the right to foreclose on the home, just as a bank would, if you don’t make your payments.
The Different Options
Some sellers offer a purchase money contract for the entire difference between the buyer’s down payment and the price of the home. Other sellers offer this type of financing for the difference between the purchase price, the down payment, and any conventional financing the buyer obtains. Sometimes buyers cannot secure a mortgage for the entire amount, so the seller offers a piggyback type loan or second lien to help the buyer.
What you get depends on the seller and your qualifications. The largest factor is usually your debt ratio. For example, if you don’t qualify for the full mortgage amount because your debt ratio is too high, a seller probably won’t offer the additional financing because your chance of paying it back is very slim. This isn’t an opportunity to get in over your head, but a chance to buy a home that you can afford but just can’t find the right financing to buy it.
The Buyer’s Benefits
Buyers benefit from a purchase money mortgage in serval ways:
- They typically have flexible guidelines
- You may have more payment options (interest only, flexible payment dates, or balloon options)
- You may ask for an adjustable or fixed rate
- You can usually negotiate the down payment
- You usually pay fewer closing costs
The Seller’s Benefits
Sellers do benefit from a purchase money mortgage as well. For starters, they often get a higher price for the home since there aren’t bank guidelines to follow. Sellers can ask for the higher price in exchange for helping the seller with financing. If nothing else, they often get full price for the home.
Sellers may also benefit from a lower tax liability since they won’t have such large capital gains receiving the full price of the home at once. It also provides sellers with regular monthly income sometimes at a higher rate than they would receive on other investments, such as mutual funds or stocks.
The purchase money mortgage, while rare, can be a great way to get you the money you need to buy a home. It’s more popular in a slow housing market when sellers sit on their homes for a long time. It never hurts to ask a seller if they are willing/capable of offering this option and it can help you get the home you want.