Loan purchase, or a Purchase-Money Mortgage, is an option for buyers with struggling credit to buy a home. While this option is available, there are downsides that should be considered before moving forward, and our goal is to help you make an educated decision on whether or not this is the right choice for you.
What is a Purchase-Money Mortgage?
Also known as seller financing, this loan is giving to the home buyer from a property seller. This is common for situations where the buyer doesn’t qualify for standard bank financing.
The seller sets the down payment, interest rate and closing fee requirements. The buyer will pay the down payment and will sign an executed financing instrument that outlines the loan details. Like a typical mortgage, the financing instrument is recorded with the county, protecting both the buyer and seller.
These loans typically happen when buyers have a bad credit score, a high debt-to-income ratio (DTI), or a low down payment and won’t qualify for traditional bank financing. Sellers who are willing will set the terms for the loan.
There are many benefits for sellers to offer a purchase mortgage, including selling at a higher price, monthly cash flow, and a higher interest rate than they would earn investing the money in other low-risk investment options.
For borrowers using this loan, they benefit from lower closing costs, flexible down payments and guidelines, faster closing, and the ability to buy a home when otherwise unqualified. However, there are also risks associated, such as foreclosure risk when the seller has the right to foreclose on the property, higher monthly payments, higher interest rates, and balloon payments when the sellers lend the buyers money for the short term in the hopes that they will refinance the loan with a traditional bank in a year or so after they fix their credit and/or have the money to afford it.
Apply Online for FREE Today
Purchasing a mortgage is a good alternative when you can’t secure traditional bank financing, but know you can afford a loan. Explore your options with the seller and determine which one fits your situation the best.