Purchase-Money Mortgage

A purchase-money mortgage is a useful alternative to traditional financing which can come in handy in some situations when a home is being sold.

With a purchase-money mortgage, the buyer of a home borrows some or all of the money to finance the transaction not from a bank, but from the seller of the home.  The seller in turn gets to charge interest on the private mortgage anf the buyer will make payments on the home to the seller instead of to another lender.

Why would a purchase-money mortgage be necessary or useful?

A lot of people think that a purchase-money mortgage is just something which a desperate seller who is unable to unload their house on a buyer uses in order to try to induce the buyer into the sale.

This isn’t true though and doesn’t make much sense when you think about it; there’s really no special incentive present here for the buyer—a loan is a loan however you look at it, and either way the buyer will still owe money on the property; he or she will just be paying it to a different party.

There are a lot of reasons why a buyer and seller might decide on this tactic.  One may be that the lender for whatever reason refuses to finance the mortgage, even though the buyer is trustworthy—this can be because the buyer’s credit isn’t up to the bank’s standards or because the property itself isn’t seen as a good investment by the lender.

Whatever the reason, if a buyer and seller decide that a private contract is advantageous, then they may choose to use a purchase-money mortgage to transfer the property.

Sometimes this decision is made because the seller is in a rush to leave the property.  Other times it can be because the amount of the bank mortgage offered to the buyer doesn’t meet the full price set by the seller. 

Another benefit for the seller is that a purchase-money mortgage enables the seller to set a high interest rate.  Interest rates on purchase-money mortgages are usually higher than those on traditional mortgages, and as such this can be some nice income for the seller on top of the asking price for the home.

If you are the buyer in a situation like this, be alert that you will be paying more money on this mortgage than you might on another.

A purchase-money mortgage is one flexible solution when standard financing won’t cover the purchase of a home.  Arrangements like this can be mutually beneficial to both buyer and seller and can facilitate the easy and swift transfer of a property.  If your situation resembles one of the ones discussed above, then consider this possibility as a way to get your business accomplished.