Brai is the founder of SW4 Insights, a public policy advisory firm based in Washington D.C. He has over a decade of experience as a journalist and consultant covering finance and economic policy, with a particular focus on distilling complex topics t.
Brai Odion-Esene ContributorBrai is the founder of SW4 Insights, a public policy advisory firm based in Washington D.C. He has over a decade of experience as a journalist and consultant covering finance and economic policy, with a particular focus on distilling complex topics t.
Written By Brai Odion-Esene ContributorBrai is the founder of SW4 Insights, a public policy advisory firm based in Washington D.C. He has over a decade of experience as a journalist and consultant covering finance and economic policy, with a particular focus on distilling complex topics t.
Brai Odion-Esene ContributorBrai is the founder of SW4 Insights, a public policy advisory firm based in Washington D.C. He has over a decade of experience as a journalist and consultant covering finance and economic policy, with a particular focus on distilling complex topics t.
ContributorKim Porter began her career as a writer and an editor focusing on personal finance in 2010. Since then, her work has been published everywhere from Forbes Advisor to U.S. News & World Report, Fortune, NextAdvisor, Credit Karma, Bankrate, and more.
Kim Porter began her career as a writer and an editor focusing on personal finance in 2010. Since then, her work has been published everywhere from Forbes Advisor to U.S. News & World Report, Fortune, NextAdvisor, Credit Karma, Bankrate, and more.
Kim Porter began her career as a writer and an editor focusing on personal finance in 2010. Since then, her work has been published everywhere from Forbes Advisor to U.S. News & World Report, Fortune, NextAdvisor, Credit Karma, Bankrate, and more.
Kim Porter began her career as a writer and an editor focusing on personal finance in 2010. Since then, her work has been published everywhere from Forbes Advisor to U.S. News & World Report, Fortune, NextAdvisor, Credit Karma, Bankrate, and more.
Updated: Jun 29, 2023, 12:49pm
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If you’re running into problems qualifying for a conventional mortgage to buy a home, there are other options you can explore. One such option is a purchase money mortgage, also known as seller or owner financing.
A purchase money mortgage is a home loan that’s provided by the owner of the property. Buyers sometimes use this option when they have a poor credit score, a high debt-to-income (DTI) ratio or a small down payment. The buyer signs a mortgage agreement with the seller, who sets the terms of the loan.
The buyer doesn’t have to deal with a traditional lender and the underwriting process, but they may have to pay a higher mortgage rate and make a balloon payment—a large payment due at the end of the loan term.
In a purchase money mortgage arrangement, the seller becomes the lender. They determine the down payment, interest rate, repayment term, fees and eligibility requirements to close the transaction.
The buyer makes monthly payments to the seller according to an amortization schedule, which shows how much money you pay in principal and interest over a period of time. Property tax payments and homeowners insurance premiums won’t be wrapped into the monthly mortgage payments, so the buyer will pay those separately. If the repayment schedule includes a balloon payment, the buyer can either pay it or refinance the loan.
In these arrangements, the seller will hold the deed until the buyer fully repays the loan. At that time, the seller executes a satisfaction of mortgage document indicating the terms of the mortgage agreement have been satisfied.
Let’s say Sally wants to buy a $80,000 home. She doesn’t qualify for a home loan with a traditional lender, so she approaches the seller, Bobby, and proposes a purchase money mortgage agreement. Sally offers a $25,000 down payment.
Bobby agrees to finance the remaining balance at a 7% interest rate for a five-year term and amortized over 20 years. This means Sally will make the same payment every month for five years that she would have made on a 20-year loan.
Sally gets the title to the home at closing, though it remains subject to a mortgage held by Bobby. Sally pays Bobby $426 per month over the next five years, covering the property tax and homeowners insurance payments separately. She then hands Bobby a balloon payment of approximately $47,000 at the end of the five years, and he releases the mortgage lien.
The type of purchase money mortgage you get is usually determined by your situation as well as the kind of property you want to buy.
A land contract is a legal agreement that allows a seller to finance a buyer’s real estate purchase. It’s often an agreement to buy a house plus the land that comes with it.
A lease-to-own is a rental agreement that gives the tenant an option to buy the home during the lease or when it expires. A portion of the monthly rent goes toward the down payment to purchase the home.
However, if the tenant chooses not to buy the house, the extra money is forfeited to the seller.
This type of rental agreement requires a purchase of the home before the end of the lease’s term. The buyer pays the seller a fee and receives the exclusive rights to buy the property at a later point in time.
A buyer can also assume—or take over—the seller’s mortgage. This option can be advantageous if interest rates have increased since the home’s purchase.
However, not all mortgages are assumable—FHA, USDA and VA loans are typically assumable as long as specific requirements are satisfied. For most FHA and VA loans, lender approval is required for an assumable mortgage. In most cases, conventional mortgages are not assumable.
A hard-money loan is a short-term loan from private individuals or companies with the home serving as collateral. The approval process tends to be faster since lenders focus mostly on the home’s value instead of the prospective borrower’s credit profile. However, these loans tend to have much higher interest rates.
Purchase money mortgage loans can help you buy a home if traditional options aren’t feasible, but it’s still important to understand their pros and cons:
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