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What is a purchase-money mortgage?
A purchase-money mortgage is a loan that the seller of a property issues to the buyer of a home as part of the property transaction. Also known as owner or seller financing, with a purchase-money mortgage the seller takes the role of the bank in offering the money to buy the home.
When the buyer of a home is unable to secure a conventional mortgage from a bank, she may choose to finance the home from the seller himself.
With a traditional real estate transaction, the buyer provides the seller with cash to obtain ownership of the property. However, when a buyer uses a purchase-money mortgage, the seller extends financing to the buyer. The buyer then repays the seller according to the agreed upon terms.
The buyer can combine this purchase-money mortgage with a bank mortgage and cash down payment. In return, the seller can ask a higher price on the house, as long as he’s willing to receive the money in monthly payments. Sellers may also decide to issue a purchase-money mortgage as an investment or to quickly sell a property.
Interest rates associated with purchase-money mortgages tend to be higher than those associated with traditional mortgage loans. This is due to the risk of lending money to a buyer who pays low down payment or has poor credit.
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Purchase-money mortgage example
Marta knows that she can’t secure approval for a conventional bank mortgage, so when she finds a house she likes, she decides to ask the seller for a purchase-money mortgage. The home costs $200,000. She provides the seller with a down payment of $10,000 and secures a purchase-money mortgage for the remaining $190,000. She pays the seller back in monthly installments, but has a higher interest rate than she would if she had been able to go through the bank.