Purchase Money Mortgages (PMM)

Simply put, the meaning of purchase money mortgage is a type of seller financing. Explicitly, a home seller issues a mortgage to the borrower as part of the buying transaction without traditional lending channels. It is a mortgage loan from a seller instead of cash for a property purchase. 

Owner or seller financing

The concept of the purchase-money mortgage in real estate finance is an intriguing and quite common one. To understand what PMM defines, we must first consider owner financing, often referred to as creative or seller financing. Seller financing means the seller backs the purchase together with the buyer. 

Sellers and buyers can benefit from this agreement because it removes bank costs as a go-between expense. In other words, the buyer will pay the mortgage to the seller monthly instead of a bank. On the downside, seller financing may double the financial risk for the owner.

The advantages of seller financing

You can find whether owner financing and the resulting PMM are alternatives in the property’s advertising. Homeowners are regularly more open to negotiating terms with buyers than traditional mortgage lenders. Though, discussing terms with buyers often implies specific interest rates too. Seller financing speeds up the house selling process in a buyer’s market.

How do purchase money mortgages work?

Usually, a PMM agreement occurs when a buyer doesn’t qualify for a mortgage through the usual lending channels. For instance, they can only apply for a traditional mortgage of $250,000. However, they need $300,000 in reality. Then, the buyer undertakes the seller’s mortgage. The seller financing makes up for the difference between what’s left of the seller’s mortgage (assumed mortgage) and the home price.

Note, don’t mistake a PMM for a traditional mortgage! Instead of acquiring a mortgage through a bank, the buyer gives the seller a specific downpayment. They also provide the seller with a financing instrument listed in public records as proof that they can pay the mortgages in the future. Insurance policies, ownership of precious metals, etc., are such instruments. Thus all parties gain financial coverage.

If the seller is the property-title holder, the buyer and seller can shake hands on a regular monthly sum, interest rate, and the period to repay the loan. 

PMM in real estate

The buyer does not have the necessary cash, and the seller agrees to take back a part of the selling price in a purchase money mortgage. Such a mortgage is ordinarily subordinated to a second-lien position; since the primary lender will require a first lien position before making the loan. 

The seller can induce a sale not otherwise possible by agreeing to take back a purchase money mortgage. The seller is protected because a PMM places a lien on the property like any second mortgage. For the purchaser, this means less cash and possibly an interest rate on the PMM less than if the buyer would have borrowed those same dollars from a primary lender. 

The second meaning of the term explains what happens when the buyer does not have the necessary cash and the seller agrees to take back a part of the selling price in the form of a purchase money mortgage. Such a mortgage is ordinarily subordinated to take a second-lien position since the primary lender will require a first lien position before making the loan. For the purchaser, this means less cash and possibly an interest rate on the PMM less than if those same dollars were borrowed from a primary lender. The seller can possibly induce a sale not otherwise possible by agreeing to take back a purchase money mortgage. The seller is protected in that a PMM places a lien on the property the same as any other second mortgage.