Definition
A Purchase Money Mortgage (PMM) is a mortgage loan provided by the seller to the buyer of a home as part of the purchase transaction. Instead of getting a loan from a bank or financial institution, the buyer agrees to pay the seller over time, using the property being purchased as collateral.
A PMM can be either a first mortgage, which has priority over other liens, or a junior lien, which is subordinate to other liens on the property. This type of financing is particularly beneficial for buyers who may not qualify for traditional loans or for properties that may not meet conventional financing standards.
Examples
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Single First Mortgage:
- Jane wants to buy a house from Tom for $200,000. Jane provides $40,000 in cash and the remaining $160,000 as a purchase money mortgage offered by Tom. This PMM is the first and sole lien on the property.
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PMM as a Second Mortgage:
- Lamar is purchasing a house from Murphy for $175,000. Lamar assumes Murphy’s existing first mortgage of $100,000 and provides $25,000 in cash. Additionally, Lamar gives Murphy a purchase money second mortgage for $50,000. This mortgage is subordinate to the first mortgage but above any other subsequent liens.
Frequently Asked Questions (FAQs)
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What are the benefits of a Purchase Money Mortgage?
- A PMM can be easier to qualify for than conventional loans, can offer competitive interest rates, and can facilitate quicker transactions.
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Are there risks involved in a Purchase Money Mortgage?
- Yes, sellers assume the risk of default, and buyers might face higher interest rates compared to conventional financing.
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Can a Purchase Money Mortgage be used for both residential and commercial properties?
- Yes, PMMs can be used for residential, commercial, and even land purchases.
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Do sellers charge interest on Purchase Money Mortgages?
- Typically, yes. The terms, including interest rate, repayment schedule, and length of the mortgage, are negotiated between the buyer and seller.
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Can a Purchase Money Mortgage be refinanced?
- Yes, like traditional mortgages, a PMM can be refinanced, subject to the terms agreed upon in the original PMM.
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What happens if the buyer defaults on a Purchase Money Mortgage?
- If a buyer defaults, the seller, as the lender, can initiate foreclosure proceedings to reclaim the property.
Related Terms with Definitions
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Seller Financing:
- A financing arrangement where the seller provides a loan to the buyer to complete the purchase.
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First Mortgage:
- The primary loan that has priority over all other liens or claims on a property.
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Junior Lien:
- A secondary loan on a property that is subordinate to the primary mortgage.
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Assumption of Mortgage:
- A process where the buyer takes over the existing mortgage of the property from the seller.
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Balloon Payment:
- A large payment due at the end of a balloon loan, a non-amortizing loan where only interest payments are made until the principal becomes due.
Online Resources
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Investopedia - Purchase Money Mortgage: Investopedia Guide
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HUD - Installment Sales Contracts: HUD Resource
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Mortgage Calculator: Mortgage Calculator
References
- Glickman, Arn A., The Essentials of Real Estate Finance. Dearborn Financial Publishing, 2017.
- Reilly, Robert M., The Complete Guide to Real Estate Finance for Investment Properties. John Wiley & Sons, 2005.
Suggested Books for Further Studies
- Real Estate Finance and Investments by William B. Brueggeman, Jeffrey Fisher
- Essentials of Real Estate Finance by David Sirota
- Investing in Real Estate by Gary W. Eldred, PhD
- The Book on Managing Rental Properties by Brandon Turner, Heather Turner
Real Estate Basics: Purchase Money Mortgage Fundamentals Quiz
### What is a Purchase Money Mortgage?
- [ ] A mortgage for luxury property purchases only.
- [ ] A type of government-subsidized housing loan.
- [x] A mortgage given by a seller to a buyer as part payment for the purchase of property.
- [ ] A loan specifically for purchasing commercial properties.
> **Explanation:** A Purchase Money Mortgage (PMM) is a mortgage loan provided by the seller to the buyer as part payment for the purchase of property, which can be an alternative to bank financing.
### Can a Purchase Money Mortgage be a first mortgage?
- [x] Yes, it can be a first mortgage or a junior lien depending on its priority.
- [ ] No, it can only be a secondary mortgage.
- [ ] It is neither; it is always superior to any mortgage.
- [ ] It is always a third mortgage without priority.
> **Explanation:** A PMM can be either a first mortgage, which has priority over other liens, or a junior lien, which is secondary to other existing mortgages.
### Who provides the loan in a Purchase Money Mortgage?
- [ ] A financial institution
- [ ] A government agency
- [ ] A brokerage firm
- [x] The property seller
> **Explanation:** In a Purchase Money Mortgage, the loan is provided by the property seller to the buyer.
### What is a key benefit to the buyer in obtaining a Purchase Money Mortgage?
- [ ] Guaranteed lower monthly payments
- [x] Easier qualification compared to traditional loans
- [ ] Complete immunity to any default risks
- [ ] Ownership transfer of additional properties
> **Explanation:** A key benefit to buyers is that PMMs can be easier to qualify for compared to traditional loans from banks or financial institutions.
### What happens if a buyer defaults on a Purchase Money Mortgage?
- [x] The seller can initiate foreclosure proceedings.
- [ ] The buyer does not face any penalty.
- [ ] The government takes over the loan.
- [ ] Both parties must share the loss equally.
> **Explanation:** If the buyer defaults on a Purchase Money Mortgage, the seller, who acts as the lender, can initiate foreclosure proceedings to reclaim the property.
### Is interest typically charged on Purchase Money Mortgages?
- [x] Yes, the seller usually charges interest.
- [ ] No, there is typically no interest charged.
- [ ] Only if the property value declines
- [ ] Only in commercial property purchases
> **Explanation:** Sellers usually charge interest on Purchase Money Mortgages, and the terms, including the interest rate, are negotiated between buyer and seller.
### Can a Purchase Money Mortgage be for both residential and commercial properties?
- [x] Yes, it can apply to both.
- [ ] No, it only applies to residential properties.
- [ ] No, it only applies to land purchase.
- [ ] Only for investment properties
> **Explanation:** A Purchase Money Mortgage can be used for residential, commercial, and even land purchases depending on the agreement between the buyer and seller.
### When can a Purchase Money Mortgage serve as a junior lien?
- [ ] Only when it is for less than half of the property's value.
- [x] When it is subordinate to an existing primary mortgage.
- [ ] When the credit score of the buyer is over 750.
- [ ] If it is sanctioned by a financial institution.
> **Explanation:** A PMM can serve as a junior lien if it is subordinate to an existing primary mortgage, as agreed between the parties.
### What do the terms of a Purchase Money Mortgage include?
- [ ] Only the price of the property
- [ ] Neighboring property prices
- [x] Interest rate, repayment schedule, and length of mortgage
- [ ] Property tax percentages
> **Explanation:** The terms of a PMM generally include the negotiated interest rate, repayment schedule, and length of the mortgage along with other variables depending on the agreement.
### Which scenario below does NOT involve a Purchase Money Mortgage?
- [x] A consumer takes a loan from a bank to buy property.
- [ ] A buyer provides the seller with a mortgage as part of the property payment.
- [ ] The seller finances part of the property price directly to the buyer.
- [ ] An existing loan assumption combined with a mortgage provided by the seller.
> **Explanation:** A Purchase Money Mortgage specifically involves the seller providing a loan directly to the buyer as part of the transaction. A loan taken from a bank is a conventional mortgage, not a PMM.
