Purchase-Money Mortgages: Defined And Explained
A purchase-money mortgage is a funding method for individuals who want to purchase a property but may not meet the requirements necessary to secure a traditional bank loan. This article will define what a purchase-money mortgage is, the benefits of using one, the various types, and how to get started.
What is a Purchase-Money Mortgage?
Purchase-money mortgages, sometimes called seller or owner financing, allow buyers to circumvent banks and traditional loan options by using a seller as a lender. Basically, the buyer assumes the mortgage on the seller’s property.
The seller sets an interest rate, down payment, closing fee requirements, monthly payment, and other loan terms to which the buyer must agree, and the property is used as collateral in the event that the buyer misses payments.
This agreement is submitted to the county government and made legally binding in order to ensure both parties are protected. It’s important to clarify that purchase-money mortgages provide buyers with equitable title, but not legal title. In other words, buyers have the right to use and possess the property, but not sell it. The seller holds the deed like a bank in a traditional mortgage.
Why Would Buyers Choose a Purchase-Money Mortgage?
The most common reason buyers use purchase-money mortgages is because they don’t qualify for a traditional bank loan. This may be due to poor credit, a high debt to income ratio, etc. Other reasons include:
- Seller’s involved in purchase-money mortgages typically charge lower closing costs than traditional lenders, which can be 2%-6% of the total loan.
- Seller’s have control over the required down payment and they are often more flexible than banks because they don’t want to prevent a buyer from making the purchase.
- There is usually less restrictive underwriting because sellers are eager to sell their property.
- Seller’s can get their property off the market more quickly because there are no banks involved so there is less red tape.
Purchase-Money Mortgage Example
Jack wants to purchase a property but he can’t qualify for a traditional loan due to poor credit. He finds Jill, who is interested in selling her property quickly.
Jill has a mortgage of $250,000 and her home is listed for $300,000. John decides to use a $50,000 purchase-money mortgage to cover the difference, and assumes Jill’s $250,000 mortgage.
In short, John is picking up the loan where Jill left off, interest rates and payments included. Jill holds on to the deed, and John makes his payments directly to her.
Loans are made or arranged by Wilshire Quinn Income Fund, LLC (the “Fund”) pursuant to California Finance Lenders Law license #603J060. The information contained in this message is for informational purposes only and is meant to provide general background information on the Fund and its manager, Wilshire Quinn Capital, Inc. (the “Manager”). Any and all information herein is deemed reliable but is not guaranteed.
Types of Purchase-Money Mortgages
The above is an example of “assuming the seller’s mortgage” (see below). However, there are several options when it comes to purchase-money mortgages.
Land Contract
Land contracts involved a buyer and seller agreeing on a down payment, interest rate, and payment plan. The deed transfers from seller to buyer once the mortgage is paid off, at which point the buyer owns the property.
Lease Option Agreement
Lease option agreements are essentially rental agreements with the option to purchase the property when the lease expires. A portion of the month-to-month rent typically goes toward a down payment on the property, but the buyer is not required to purchase the property when the agreed upon date comes. However, the buyer loses any money put toward purchase in the event they choose not to buy.
Lease-Purchase Agreement
Like a lease option agreement, lease-purchase agreements are rental agreements. However, the buyer must purchase the property before the agreement expires. The buyer can make the purchase with a traditional mortgage, or the seller can offer financing.
Assuming the Seller’s Mortgage
As laid out in the example above, assuming the seller’s mortgage involves a buyer taking over the seller’s mortgage at the same rates. Buyers in this situation have two mortgages, the assumed mortgage and the purchase-money mortgage. This is simply due to the fact that property values typically increase over time, so the property is likely to sell for more than the existing mortgage amount.
Hard Money Loans
Hard money loans come from private lenders who use the property as collateral. Allowing them to reduce risk while funding buyers who may not have the financial qualifications required for a conventional bank loan. The short-terms of hard money loans make them an excellent option for buyers who need to close quickly or don’t fit in the box of a traditional lender.
If you can’t secure financing through conventional methods but want to purchase an investment property, then a hard money loan may be right for you. They are much easier to qualify for and the funding process is much quicker than a traditional loan.
Finding a hard money business loan suited to your needs begins with contacting a lender with a reputation for funding quickly and strong customer service.
At Wilshire Quinn, we have provided rapid and reliable funding to borrowers since 2011. We have since become one of California’s premier hard money lenders. Contact us today and find out how we can help you reap the benefits of a hard money loan the right way.
- Funding typically in 5-7 business days
Loan Amounts from $200,000 to $20,000,000
Interest Rates from 7.5% to 11%
Loan Term: 3 – 24 months
Commercial & Residential (non-owner occupied) Real Estate
- Purchase, Refinance, Cash-out Refinance, Rehab, Blanket Loans
Foreign National Loans Available
About Wilshire Quinn
Wilshire Quinn is a San Diego hard money lender focused on short term bridge loans, secured by first trust deeds. The company is based in San Diego, CA with offices in Los Angeles and San Francisco. Wilshire Quinn typically funds loans for their customers in 5-7 days. Their successful track record is closely linked to their ability to make immediate lending decisions based on their highly disciplined underwriting approach. The company funds a variety of loans such as: refinance, purchase, blanket, rehab loans, 1031 exchange, partnership buyouts, and more. They originate hard money loans ranging from $200,000 – $20,000,000. Wilshire Quinn works with commercial and residential buyers nationwide.
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