Securing a loan for a house may not always be an easy task. Sometimes, a buyer’s credit history is bad or too limited for the bank to consider giving them a loan. In these situations, you may consider getting a different kind of mortgage.
Purchase money mortgage is an alternative for homebuyers who cannot secure a mortgage for their new house. It carries certain benefits for both the mortgage provider and the borrower.
Purchase Money Mortgage Definition
Purchase money mortgage is a loan that the seller of the property gives to the buyer of the property to help them purchase it. It becomes an option on the table when the buyer is unable to secure a conventional mortgage from the bank due to any number of reasons. This sort of a purchasing option is also known as seller or owner financing, and the owner of the property, in effect, assumes the role of a bank. The buyer is required to pay back the purchase money mortgage, or a section of the price of the house deferred to him or her by the owner, in instalments to the seller of the house.
Purchase Money Mortgage Example
Suppose person A is interested in buying a house that costs $300,000. They contact a bank for getting a mortgage but are denied due to their low credit score. They then turn towards the seller of the house, person B, who agrees to give them a purchase money mortgage. Delighted, person A pays a certain amount of the principal (or total cost) of the house as down payment and agrees to pay the rest in monthly instalments with interest. To make up for the low credit at which person B is providing the purchase money mortgage to person A, person A has to pay a higher interest rate as compared to if they had received the mortgage through a bank.
Benefits of Purchase Money Mortgages
This special kind of mortgage carries benefits for both the buyer and the seller of the mortgage.
Benefits of Purchase Money Mortgages To Buyers
Buyers are not liable to show untarnished and flawless credit histories when going for a purchase money mortgage. They are able to secure a home with much less scrutiny, a much less credit score and smaller work history. The entire process will also be much faster as compared to getting a loan from the bank. The buyer will be saved some overhead fee, like processing fee, administrative fee and services fee. They are at liberty to decide the terms of the loan as well. They could go for a smaller down payment rather than a lump sum or opt to pay the down payment in instalments. The instalments options are also open. Overall, a purchase money mortgage is a much more flexible and easier option for the buyer, even though they may have to pay a higher interest rate as compared to a conventional mortgage.
Benefits of Purchase Money Mortgages To Sellers
Sellers stand to gain quite a few advantages from a purchase money mortgage. Firstly, the seller receives a larger interest in her property than she may have received while selling through a middleman. This means bigger monthly payments and increased monthly income. The seller will also pay lesser in taxes from a sale based on an instalment plan. Properties sold this way also bring in full price of the house, if not higher.
Purchase Money Mortgage Priority
Purchase money mortgage priority is the priority in terms of lien on the house. This lien is also known as a super lien. But what is a lien? A lien is a legal right that the lender has over any asset they may be giving out a loan for. This means that if the borrower of the loan defaults on his or her payments, the lender has a right to confiscate the collateral (the asset for which the loan was given), sell it and use the money to make up for the unpaid debt.
A super lien is a lien that is superior to all previous claims of liens on a property. A purchase money mortgage provides a claim of super lien to the seller of the house, and this is counted as the purchase money mortgage priority.
Sometimes, sellers tend to give a purchase money mortgage on their property while some liens may exist on it. By giving out a purchase money mortgage, they ensure priority over all previous claims of liens by establishing a super lien.
Purchase Money Mortgage Law
The law that allows buyers and sellers to enter into a purchase money mortgage agreement differs a little from state to state. Generally, the priority of purchase money mortgage is observed throughout.
The law regarding title deeds through purchase money mortgage is different for the type of purchase money mortgage in question. If it is a land contract, the law requires the buyer to have equitable ownership of the land. This means that they are not the actual owners yet, but after they have paid off the debt to the buyer, they will have the right to own the piece of land in their name.
In case of a purchase money mortgage for a house or apartment, both the parties enter a lease-purchase agreement. This means that the buyer leases the house or apartment on a fixed monthly rate while maintaining an equitable title in the property. Once the conditions and time period of the lease-purchase agreement ends, the buyer gains full ownership of the house.
Purchase Money Mortgage Form
The form for a purchase money mortgage is typically available from the realtor that you are buying the property through. Most realtors’ associations will provide you with a comprehensive form outlining the legal rights to the property in question by both the buyer and the seller.
Alternatively, you may get a form from the Securities and Exchange Commission (SEC). Certain states also have purchase money mortgage forms available on their official real estate website.
When filling the form, consult a field specialist. This can be a trusted realtor, a lawyer or a consultant. Ensure that your rights are being upheld and the terms and conditions are not in violation of the state laws.
You can get samples and usable copies of the purchase money mortgage form from stewart.com’s website as Owner Finance Addendum, or the website for Wisconsin Real Estate Forms Library or from the archives of SEC available online.
To wrap things up, a purchase money mortgage is an easier alternative to purchasing a property if you are denied a conventional mortgage. You get to tailor-make your instalment plan while maintaining an equitable right in the property. Sounds like a good deal!