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A purchase money mortgage, also called seller financing, is a form of financing that allows buyers with poor credit to purchase a home. It also lets the buyer avoid dealing with the often-strict terms of a bank loan.
Is this the right type of loan for you? Here’s a closer look at purchase money mortgages and how they work.
What Is a Purchase Money Mortgage?
With this type of mortgage, the seller of the home, rather than the bank, lends you money. It’s usually used for buyers who don’t qualify for standard bank loans. There are several reasons you may not qualify:
- A poor credit score
- A high debt-to-income ratio
- A recent job change
- A small down payment
With a purchase money mortgage, the home's seller decides the required down payment, interest, and closing costs. The seller holds the deed to the house until you have paid off the loan.
This may sound like a casual agreement. But to ensure your and the seller's interests are protected, the county records the final signed contract where the home is being sold.
What Types of Purchase Money Mortgages Are There?
You and the seller can negotiate the terms of your mortgage. But there are a few general types you may consider:
- Land Contract: Works like a traditional mortgage with the seller as the “bank”
- Lease Option Agreement: A rental agreement where you have the option to buy the home during the lease
- Lease-Purchase Agreement: Like a lease option, but you are required to buy the home before the end of the lease
In some cases, you may be able to take over the seller’s mortgage and pay the rest of the price of the home with a purchase money mortgage. However, to take over the mortgage, you must be approved by the original lender.
How Does It Benefit the Buyer?
Purchase money mortgages let you purchase a home when you may not be able to otherwise. You can negotiate the down payment with the seller, and sellers will usually accept lower down payments than a bank would. Closing costs are also typically lower than with a bank mortgage.
How Does It Benefit the Seller?
What is a purchase money mortgage’s benefit to the seller? The seller can often make more off of the home sale than they could with a regular mortgage. They can often sell the home for the list price or even more. Taxes payable are reduced and can be paid over time as the seller receives payment for the sale in installments.
Sellers can also charge fairly high-interest rates, as they're taking a risk by lending to someone who may not qualify for a traditional mortgage. However, they will receive payment for the home monthly, so they can count on a regular cash flow.
Ready to Buy a Home?
If you’re having trouble qualifying for a mortgage, you might think your dream of buying a home is out of reach. But with a purchase money mortgage, you can move into your dream home sooner than you think! Contact us to request rates today.
