What Is a Purchase-Money Mortgage? Definition, Types, Benefits

By
Adam Hayes
Full Bio

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Learn about our editorial policies
Updated April 07, 2022
Reviewed by
Thomas J. Catalano
Thomas Catalano
Reviewed by Thomas J. Catalano
Full Bio

Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas' experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.

Learn about our Financial Review Board
Fact checked by
Suzanne Kvilhaug
Suzanne Kvilhaug
Fact checked by Suzanne Kvilhaug
Full Bio
Suzanne is a content marketer, writer, and fact-checker. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies for financial brands.
Learn about our editorial policies

What Is a Purchase-Money Mortgage?

A purchase-money mortgage is a mortgage issued to the borrower by the seller of a home as part of the purchase transaction. Also known as a seller or owner financing, this is usually done in situations where the buyer cannot qualify for a mortgage through traditional lending channels. A purchase-money mortgage can be used in situations where the buyer is assuming the seller's mortgage, and the difference between the balance on the assumed mortgage and the sales price of the property is made up of seller financing.

The Basics of a Purchase-Money Mortgage

A purchase-money mortgage is unlike a traditional mortgage. Rather than obtaining a mortgage through a bank, the buyer provides the seller with a down payment and gives a financing instrument as evidence of the loan. The security instrument is typically recorded in public records, protecting both parties from future disputes.

Whether the property has an existing mortgage is relevant only if the lender accelerates the loan upon sale due to an alienation clause. If the seller has a clear title, the buyer and seller agree on an interest rate, monthly payment, and loan term. The buyer pays the seller for the seller’s equity on an installment basis.

Types of Purchase-Money Mortgages

Land contracts do not pass legal title to the buyer but give the buyer equitable title. The buyer makes payments to the seller for a set time period. After the final payment or a refinance, the buyer receives the deed.

A lease-purchase agreement means the seller gives the buyer equitable title and leases the property to the buyer. After fulfilling the lease-purchase agreement, the buyer receives the title and credit for part or all of the rental payments toward the purchase price and then typically obtains a loan for paying the seller.

Purchase-Money Mortgage Benefits for Buyers

Even if the seller requests a credit report on the buyer, the seller’s criteria for the buyer’s qualifications are typically more flexible than those of conventional lenders. Buyers may choose from payment options such as interest-only, fixed-rate amortization, less-than-interest or a balloon payment. Payments may mix or match, and interest rates may periodically adjust or remain constant, depending on a borrower’s needs and seller’s discretion.

Down payments are negotiable. If a seller requests a larger down payment than the buyer possesses, the seller may let the buyer make periodic lump-sum payments toward a down payment. Closing costs are lower as well. Without an institutional lender, there are no loan or discount points or fees for origination, processing, administration or other categories lenders routinely charge. Also, because buyers are not waiting on lenders for financing, buyers may close faster and receive possession earlier than with a conventional loan.

Purchase-Money Mortgage Benefits for Sellers

The seller may receive full list price or higher for a home when providing a purchase-money mortgage. The seller may also pay less in taxes on an installment sale. Payments from the buyer may increase the seller’s monthly cash flow, providing spendable income. Sellers may also carry a higher interest rate than in a money market account or other low-risk investments.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

  1. Rocket Mortgage. "Land Contracts: What They Are and How They Work."

  2. Rocket Mortgage. "Lease Purchase Agreement: What You Should Know."

  3. Internal Revenue Service. "Topic No. 705 Installment Sales."

Compare Mortgage Lenders
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.