Unlike many other common terms associated with real estate and its financing, a "purchase money mortgage" means what it appears to describe -- a loan that assists people in buying real estate. The term can refer to standard first mortgage loans made by banks, credit unions and mortgage companies, or "government" loans made or guaranteed by agencies of the U.S. government, but most often they describe home sellers providing financing to help sell their property.
Conventional Purchase Money Mortgages
A conventional mortgage refers to any loans not involving the U.S. government. Therefore, all mortgages not offered by the FHA (Federal Housing Administration, VA (Veterans Administration) or RHS (Rural Housing Service, from the U.S. Department of Agriculture) count as conventional loans. Conventional loans used to buy -- not refinance -- real estate are purchase money mortgages. While typically available up to 80 percent of a home's selling price, some conventional purchase money mortgages permit borrowing up to 90 to 95 percent of the property price.
Government Purchase Money Mortgages
FHA and VA mortgages rate as the most popular government loans. Current and former members of the U.S. military can qualify for a VA mortgage, with rules that make it easier for veterans to afford to buy a home. Although they do not make direct loans, the FHA guarantees mortgages made by its approved lenders. As purchase money mortgages, available to everyone, these programs help borrowers with less-than-perfect credit or little cash purchase homes at low rates and good terms.
A Seller Purchase Money Mortgage
Some home sellers, for financial reasons or to help sell their property, offer to provide purchase money mortgages to prospective buyers. Often, when you hear the term "purchase money mortgage," this type of financing is what the speaker is talking about. This is also known as seller or owner financing. This type of transaction may be good for buyers who cannot qualify for mortgages through traditional lending channels. Sellers may finance the entire home purchase price or offer to "take back" a purchase money second mortgage. For example, you want to buy a home for $200,000. You've been approved for a $150,000 first mortgage, thereby needing $50,000 cash to complete the purchase. However, you only have $30,000. The home seller offers to take the remaining $20,000 as a purchase money deed of trust mortgage, which will be recorded as a second mortgage after the primary loan's recorded on the deed.
The property doesn't need to have an existing mortgage to go through with a purchase money mortgage. Buyers have the option of choosing from a range of payment options, including interest only, fixed rate or balloon payment. Also, the interest can be lower. Payments can be adjusted according to the buyer's and seller's needs.
Other Purchase Money Lenders
Instead of seller financing, third-party lenders sometimes make purchase money mortgages to help buyers complete the process of buying a home. In some cases, first mortgage lenders may offer "80/20" loans. For example, you wish to buy a $200,000 home. Your lender agrees to give you an 80 percent ($160,000) first mortgage and a 20 percent ($40,000) second mortgage to complete the deal. Other lenders may be willing to loan up to 20 percent as a purchase money contract for a second mortgage, recorded after your first mortgage.
In the case of buying land, a lease purchase agreement means the seller gives the buyer equitable title, leasing the property to the buyer. Once the lease purchase agreement is fulfilled, the buyer receives the title, and credit for the rental payments for the purchase price. Then the buyer usually gets a loan to pay the seller.
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