What Is a Purchase Money Loan?
A purchase money loan, also known as a seller financed mortgage, is essentially a private home loan between the buyer and seller of a home. The money borrowed by the buyer is loaned by the seller. In other words, the person who buys the home would pay back the outstanding mortgage to the seller of the home. It often serves as an alternative to traditional mortgage financing through a bank.
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Advantages for the buyer
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Purchase money loans are in some ways easier to obtain as the seller may not require a background or credit check or employment verification. Also, the seller may be able to include appliances or other perks into the sale, according to FinancialWeb.com's Seller Financing. These kinds of loans also decrease the closing costs for both parties and can make the sale of a home move along faster.
Advantages for Seler
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The seller of the home can charge any amount of interest they see fit and as such has the potential to recover the equity on the home in addition to the added revenue from interest. Because the buyer probably did not qualify for a traditional home financing loan, the odds that the buyer will haggle over a higher interest rate are slim. Further, purchase money loans can increase the pool of potential buyers for a seller in a rough marketplace. Also, as FinancialWeb.com explains, the seller can decide to sell the house the way it is and therefore not need to make improvements or replace the carpeting to sell the home.
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Disadvantges for Buyer
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The buyer could ultimately have a hard time obtaining the actual home title even after the loan to the seller is paid off. In addition, the buyer who regularly makes payments on the loan has no real way of knowing whether the seller is beholding to another loan and using that money to pay the senior loan off. Taxes and accountability issues in the event of the buyer's fiscal hardship may also be incredibly complex and take a lengthy and potentially expensive time to sort out legally.
Disadvantages for Sellr
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The seller of the home must have paid off the mortgage in full to issue a purchase loan agreement. Since they do not have verified information about the buyer's employment status or credit history, the seller runs a higher risk of possible foreclosure on the home due to non-payment. After some time, the buyer may improve their situation enough to transfer the loan to a traditional lending institution thus taking away the seller's income from the loan.
Why These Loans Are Rare
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It can be difficult to obtain a purchase loan agreement because often a home seller wants to use the money from the sale to purchase a new home. The potentially high risks the seller incurs also deters many sellers from this option. If a purchase money loan is agreed to, it is a good idea for the buyer and seller to obtain legal advice so issues of liability and title transfer are taken care of before the contract is signed.
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References
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