When you are ready to purchase a new home, you have two primary choices: purchasing it using cash or financing it through a mortgage.

And although it can be argued that cash purchasing offers some advantages (e.g. avoiding mortgage related interest and fees), this is not a realistic option for most homebuyers. For those who require or desire more financial flexibility, a mortgage is the better option.

First, to obtain a home loan, one must find a lender or a lending institution. These institutions are typically banks, but they may also be the Federal Housing Administration or Veteran Affairs. Yet, one may encounter difficulties qualifying or finding a mortgage lender. And in this case, a purchase-money mortgage may be a good option.

We will explore what is a purchase money mortgage, what its advantages are, and how you can go about obtaining it.

What Is A Purchase Money Mortgage?

This might be the first time you have encountered the term, “purchase-money mortgage”. Regardless, it is defined as a mortgage that is sold by the house seller to the buyer. The mortgage is factored into the price of the house purchase. 

Effectively, the seller or owner of the house is also the lender. So, this means the seller establishes the entire buying price: from down payments, interest rates, closing fee requirements, and more.

What are the Types of Purchase-Money Mortgages?

There are two main types of this mortgage category. The first type is a land contract. In this, the buyer is interested in a seller’s plot of land and its included real estate. However, the buyer does not get a legal title. The buyer simply makes payments to the seller for a set time period, after which, they own the property.

The second type is a lease-purchase agreement. In contrast to the land contract, this one grants the buyer a legal title. Upon completing the lease-purchase agreement, the lease paid counts as credits that count for part, or all, of the money leased to complete the house purchase.

Despite their differences, both types of purchase-money mortgages have some common requirements.

What Does a Purchase-Money Mortgage Require?

A unique aspect of this type of mortgage is that the buyer must provide both a down payment and also a financing instrument. The latter acts as evidence of the loan for the seller.

The security instruments used in the purchase-mortgage transaction are usually written down in public records. Such documentation functions to protect both the seller and the buyer from future disputes.

Despite the extra step this mortgage requires, there are certain benefits to purchasing a money mortgage for both the seller and the buyer of the house. 

The Advantages to Purchase-Money Mortgage

A purchase-money mortgage may be the best option for an interested home buyer for a couple of reasons. An individual may not qualify for a traditional house loan. It is also possible one is simply ineligible for a number of reasons. 

Someone may be rejected for a home loan if they have a bad credit score, a high debt ratio, or a low down payment. A notable disadvantage of a purchase-money mortgage are the high down payments and interest rates buyers commonly assume.

And the seller often benefits to the disadvantage of the buyer here. Because sellers are not bound to usury limits, they can set their own interest rates without limitation from the state. The usury rates refer to the interest rate limits set by the state government. 

And there you have it! We hope that this article has helped you gain an insight on what a purchase money mortgage is and how to use it.

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