A Purchase Money Mortgage is when the seller of real estate provides the mortgage loan to the buyer, which is better known as Seller-Financing. Here, both the seller and buyer can benefit greatly from this type of transaction.
The seller may have an opportunity to be able to sell the property at a slightly higher price.The seller will also be able to pick up additional monthly income from the future interest payments and the seller may be able to spread the gain on the property over a couple of different tax periods.
Benefits for the buyer include the ability to be able to move faster to the new property. This is a great benefit if the buyer must sell their existing property, but needs to move right away because of a job. A buyer may also not be able to qualify through a typical bank or lender due to their debt to income ratio not being able to meet the lender’s limits with owning two properties.
This quick move, allows the buyer time to move their family into their new home sooner and still take the necessary time to sell their other home. This could be important to a family for the start of a new school year.
If this purchase is an investment property or for a business purchase, a purchase-money mortgage would allow a buyer faster access to the property to establish their business sooner; or just capture a specific market condition in their best interest.
There are some down sides to purchase-money mortgages. Most often, appraisals are not attained by the buyer and the purchase becomes one clouded with emotion and the buyer does not see the true value. This may result in over-paying for the property.
The private mortgage may have to be held for a minimum of 181 days before another lender can refinance the property. If the buyer had originally paid too much for the property as per the new lenders appraisal the buyer may have to bring addition funds to the table.
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