A purchase money mortgage is a term used to describe mortgages issued by third parties excluding traditional lenders and financial institutions.
The main difference between purchase money loans and regular home loans is that in the former, the mortgage and title are conveyed in the transaction.
Basically, a buyer provides the seller with a note and down payment. It is then recorded with the public office for legal documentation.
In practice, the use of purchase money mortgages is mostly observed in creative financing of real estate deals, and specifically in owner financing.
These situations can arise when the seller is very keep to let go of the property but the buyer is unable to obtain the amount of funds, in full or in part, to complete the purchase transaction.
For example, if a house is to be transacted for $100,000 and the buyer only has $10,000 for down payment, while the bank is only willing to finance $$82,000, then the shortfall of $8,000 can be covered with a purchase money note from the buyer. The lender will have the first lien while the seller would have a second priority claim.
When a mortgage is assumable, then owner financing in the form of a purchase-money mortgage might make up the difference between the existing loan and the transaction price.
In this case, the seller might have no other choice but to provide full financing for the deal.
In the event where it concerns unencumbered property, then it’s just a matter of hte two parties agreeing on the terms of the mortgage.
Purchase money mortgages are also common with land contracts.
A landowner might accept a partial cash down payment and accept such a mortgage for the remainder of the agreed purchase price. And as the developer slowly builds improvements on the land lots are sold to pay off the mortgage.
This enables him to obtain financing without needing to have good credit.
The biggest benefit of such deals for sellers is that they get to sell their properties, usually at a desirable price.