Legal Definitions - Purchase Money Mortgage

A Purchase Money Mortgage is a specific type of loan used to buy real estate where the buyer borrows money directly from the seller to cover part of the purchase price. Instead of the buyer paying the entire amount in cash or through a traditional bank loan, the seller agrees to finance a portion of the sale, essentially acting as a lender. The buyer then makes regular payments to the seller, similar to how they would to a bank.

This arrangement is often used when a buyer cannot secure a large enough loan from a traditional lender, perhaps due to credit history, insufficient down payment funds, or if the property itself is difficult to finance through conventional means. While it can help facilitate a sale, purchase money mortgages typically come with higher interest rates than those offered by banks.

Here are a few examples illustrating how a Purchase Money Mortgage might work:

• Scenario 1: Bridging a Financing Gap for a First-Time Homebuyer
  A young couple, Sarah and Tom, are excited to buy their first home, listed at $350,000. They have saved $30,000 for a down payment and have been approved for a $280,000 mortgage from a bank. This leaves a $40,000 gap between their financing and the home's price. The seller, eager to close the deal, agrees to provide a $40,000 purchase money mortgage to Sarah and Tom. This illustrates a Purchase Money Mortgage because the seller is directly financing the remaining $40,000 of the purchase price, allowing Sarah and Tom to buy the home without needing additional cash or a larger bank loan. They will make payments to both the bank and the seller.
• Scenario 2: Facilitating the Sale of a Commercial Property
  An entrepreneur, Mr. Chen, wants to purchase a small office building for his growing business, priced at $800,000. His bank has approved a loan for $650,000, and he has $100,000 in cash for a down payment. To ensure the sale goes through, the current owner of the building agrees to provide a $50,000 purchase money mortgage to Mr. Chen. Here, the seller is using a Purchase Money Mortgage to help Mr. Chen acquire the property by covering a portion of the financing that traditional lenders would not. This benefits both parties by enabling the transaction to proceed.
• Scenario 3: Selling a Unique Rural Property
  Ms. Rodriguez is selling a remote cabin and several acres of undeveloped land for $200,000. Due to the property's unique characteristics and isolated location, traditional banks are only willing to lend a maximum of $140,000. A potential buyer, who has $20,000 in savings, is very interested but needs an additional $40,000. Ms. Rodriguez, who owns the property outright and wants to sell it quickly, agrees to provide a $40,000 purchase money mortgage. This example demonstrates a Purchase Money Mortgage being used to overcome challenges in securing traditional financing for a less conventional property. The seller's willingness to act as a lender makes the sale possible for the buyer.