Purchase Mortgage or Purchase-Money Mortgage is a type of mortgage that is offered by the seller or the owner of a home to the borrower, as a part of the home buying transaction. This is apt for home buyers who do not qualify for traditional or conventional mortgages.
You can find many sellers who are ready to lend purchase mortgages. In fact, if you have been looking at buying homes from quite some time now, you may even have got calls from a couple of such sellers. These are those that have bought purchase mortgage leads from professional lead generating firms, in order to contact potential buyers.
How Purchase Mortgage works
The buyer pays up the down payment to the seller and then offers a financing instrument as an evidence for the loan. This security instrument will be recorded in the public records so that both parties are adequately protected from any disputes in the future.
If there is no existing mortgage on the property and if it has a clear title, the buyer and seller will discuss together and agree upon an interest rate, loan term and monthly payment. The seller’s equity would be paid by the buyer in equal monthly instalments.
Types of Purchase Mortgages
There are two types of purchase mortgages:
- Land contracts: In these types of purchase mortgages, the buyer does not get the legal title until the full amount is cleared. However, he gets the buyer equitable title. There is a set time period within which the buyer has to make the complete payment. He receives the deed upon the final payment or the refinance.
- Lease purchase agreement: In this type of mortgage also the buyer gets the buyer equitable title. However, the property will be leased to the buyer. He gets the legal title after fulfilling the lease purchase agreement. He also gets the credit for the rental payments (either in part or in full) in order to pay up the purchase price. He gets a loan in order to pay the seller.
Benefits of purchase mortgages
The benefits of purchase mortgages are two folds. They are advantageous to both the parties involved – the buyer and the seller.
Benefits to Buyers
They are easy to qualify for
Purchase-money mortgages can be availed easily as the seller’s criteria would be much more flexible when compared to other conventional types of mortgages. The credit score requirement also is much lower.
The terms and conditions are flexible
You have different payment options to choose from such as fixed-rate amortization, interest-only option, balloon payment option or less-than-interest option. You can even mix and match these and come up with an option that is convenient for both of you. You can adjust the interest rate periodically or let it remain constant according to your requirements and also the seller’s discretion.
Negotiable Down Payment
The down payment amount is usually decided by the seller. However, if it is more than what you have, the seller might allow you to pay it up in instalments of lump-sum amounts.
Low Closing costs and interest rates
Since there is no institutional lender in this type of mortgage, you don’t have to pay any fees or discount points at the time of origination, processing or administration. The interest rates are also much lower than the conventional loans and refinances.
Early Possession Possibilities
In this kind of mortgage you don’t have to wait for your lender for financing as the seller himself is the lender. Therefore the deal will close faster and you can receive the possession much earlier when compared to conventional loans.
Benefits to Sellers
Option to sell home at a higher price
By offering a purchase-money mortgage the seller gives an opportunity to a buyer to own his home, even if he doesn’t qualify for a conventional mortgage. He can receive the full-list price or even a higher price for his home, irrespective of the market condition.
The taxes are low
A sale involving a purchase mortgage is considered as an instalment sale and therefore the taxes that the seller will have to pay will be a whole lot lesser when compared to a regular sale.
Steady Source of Income
The payments that the buyer makes help the seller obtain spendable income every month, on a consistent and continuous basis.
Better Returns on Investment
The seller gets to enjoy a better interest in a purchase mortgage, when compared to any other low-risk investment. Also, he carries the legal title of the property until the loan is completely paid off by the buyer.
Although a purchase mortgage comes with so many advantages, not just for the buyer, but for the seller too, it could make things difficult when it comes to evicting a defaulting buyer. This is one reason why the seller will have to enter into a proper purchase agreement that details all the responsibilities of the buyer, before the sale actually happens. Also, such a purchase agreement needs to be properly recorded to avoid any problems in the future.
Before finalizing the deal, it is advisable that the seller performs his due diligence and verifies the background of his buyer thoroughly. Also, it would be better to include a due-on-sale clause in the purchase agreement. Such a clause will protect the interests of the lender in case there is a sale or a transfer of the property. The seller can demand complete repayment of the loan in case any such situation arises.
The buyers should also do some due diligence before deciding on a purchase mortgage. Although many sellers might contact the buyers by buying purchase mortgage leads, it is better to shop around and compare the quotes before finalizing. Look at different options and check out different types of loans in order to find out which one suits your requirements, the best way.
Buying a home is one of the most significant decisions of anyone’s life. Any errors here might prove really costly and stressful. It is important to tread carefully.
Author: Nick Davis