Purchase Money Loans are surely a great way in case you are short of money while buying a home for yourself, then you surely need a financing source to raise money from. And most of the Americans do rely on financing to raise the desired amount of capital. And while buying a home you can also raise loan from the seller from where the term Purchase Money Loan originates. So, let us understand What is this Purchase Money Loans? As well as its definition.
What Is Purchase Money Loans?
A type of loan that is specifically issued to the buyer of a house or home by the seller himself is referred to as the Purchase Money Loans. It is also known by the names of seller financing or owner financing.
So, with Purchase Money Loans you can get a direct loan from the seller and do not need any third party or financer or bank.
These types of loans are commonly used by individuals having difficulty in getting a loan or with a poor credit score.
Purchase Money Loan definition
The Purchase Money Loan definition is stated as a home loan that is used to purchase a piece of property, in which the loan is issued by the seller of a property to the buyer of a home.
Thus, by Purchase Money Loan meaning it is clear that it is also a purchase loan or a type of loan that is directly issued by the seller of the property.
Terms used with Purchase Money mortgage Loan:
- Purchase Money Loan in real estate: We also use this term in real estate as Purchase Money Loan in real estate that depicts the involvement of property while taking up the loan.
- Purchase Money business Loan: A purchase loan that is specifically taken up for the business purpose and involves the purchase of the commercial property. This loan is also issued by the buyer of a house or home by the seller himself for a business related purpose.
- Purchase Money second mortgage Loan: A Purchase Money second mortgage Loan is already issued loan that also has a pre-determined EMIs. A separate loan account is opened by the bank to enable repayment of the loan.
Types of Purchase Money Loan
Although a normal Purchase Money Loan is the one made from the seller to the buyer, which acts the same as to the one issued by the banks or financial institutions to the buyer of a home. But there also exists some types of Purchase Money Loan that exists and plays the same role as Purchase Money Loan which are as follows:
- FHA Purchase Money Loans
- VA Purchase Loans
- FHA Purchase Money Loans: Here, the down payment while purchasing a home is as low as 3.5 % of the sales price of the house. Here, you get the help in order to pay the down payment of the house. Here, the Federal Housing Administration which is governed by the Department of Housing and Urban Development plays a major role in ensuring as well as issuing the FHA loans. Though, FHA loans can be issued by an investor to borrowers of the property. Thus, FHA in FHA Purchase Money Loans stands for Federal Housing Administration.
- VA Purchase Loans: Here, VA refers to the Veterans Affairs or say active and non-active military members and their spouses. So, this VA Purchase Loans are available to them under certain circumstances. You can also use this type of VA purchase loan for new construction or certain repairs in the house.
How does a purchase money mortgage work?
Mortgage purchase money is the same as the traditional method of taking loans or financing. Here, instead of obtaining a mortgage through a bank as traditional method, the buyer of the home pays a certain amount as a down payment and issues a type of financing instrument as evidence of the loan to the seller.
And in order to avoid any kind of dispute between the two parties or the seller and the buyer we record security instruments in public records.
Here, also both the parties agree on the amount of the loan, period of its repayment as well as the interest charged by the seller and interest to be paid by the buyer.
What is the purchase money note?
A purchase money note acts as a promissory note between both the parties, i.e. the buyer and the seller which depicts the Receivables Subsidiary from the Issuer or any Subsidiary to the one who is receiving the Subsidiary (buyer). So, it is a written agreement between the parties.
Purchase Money Loan vs refinance
Purchase Money Loan is a type of loan that is specifically issued to the buyer of a house or home by the seller himself, where you obtain a loan by borrowing money from the lender to purchase a house. Although, refinance or refinance loan is a type of loan that is already in existence and you want to refinance that loan for another property.
Things to keep in mind before entering into a purchase money mortgage:
- The terms involved in the contract: You should pay attention to the terms and conditions attached to the contract made between the buyer and the seller and plan out an agreement that is favourable for both the parties and for this the following things should also be considered which are as follows:
- Loan term: The term or the period of loan in which the buyer will pay out the dues or loan amount.
- Down payment: The amount of down payment that the buyer pays to buy the property and as security money for the seller.
- The interest rate: the rate of interest that the buyer needs to pay to the seller, and the seller is willing to charge from the buyer. Both parties should agree on the same rate of interest.
Purchase money deed of trust:
A purchase money deed of trust involves purchase money note that is secured by a mortgage or deed of trust which is issued by the buyer himself as the borrower of the property to the seller who is also the lender to purchase the desired property by paying the loan amount.
Purchase Money Loan Calculator:
You can use Purchase Money Loan Calculator for calculating your purchase money finance. While calculating Purchase Money Loan we see involvement of 3 methods which are as:
- Amortized Loan: Where you pay a fixed amount of money in a year.
- Deferred Payment Loan: Where you pay a lump sum amount at maturity.
- Bond: Where you pay a pre- determined amount at maturity.
So, Lets calculate the amount in all the 3 cases:
- Amortized Loan: Here, the Loan Amount is $ 2,00,000 The Loan Term is 10 years Interest Rate is 10 % compounded annually and the Pay Back period is monthly. We will calculate the amount of purchase money payment for each month and the total payments with interest.
So, the result by calculating we get is:
- Payment Every Month $ 2,595.51
- Total of 120 Payments $ 311,461.11
- Total Interest $ 111,461.11
- Deferred Payment Loan: Here, the Loan Amount is $ 2,00,000 The Loan Term is 10 years Interest Rate is 10 % compounded annually and the Pay Back period is annual. We will calculate the amount that is due at the time of maturity as well as the interest amount.
So, the result by calculating we get is:
- Amount Due at Loan Maturity $ 518,748.49
- Total Interest $ 318,748.49
- Bond: Here, the Loan Amount is $ 2,00,000 The Loan Term is 10 years Interest Rate is 10 % compounded annually and the Pay Back period is annually. We will calculate the amount received when the loan is started and the total amount of interest.
So, the result by calculating we get is:
- Amount Received When the Loan Starts: $ 77,108.66
- Total Interest $ 122,891.34
Read here- The Line of Credit vs Loan- What’s Better?
Frequently Asked Questions
What is the closing disclosure entry for a loan on purchase money mortgage?
The closing disclosure entry for a loan on purchase money mortgage will be shown by Crediting the buyer and debiting seller.
Can you buy a lot with a loan?
Yes, you can buy a lot with a loan but your credit history as well as your credit scores are accessed by the banks or financial institutions before issuing loans which depict the amount of loan for which you qualify.
What does conventional real estate loans including purchase money first mean?
In case of the traditional method of buying a property or home the buyer pays the seller in cash as his payment and repays the amount of cash, he has borrowed later. While in the case of conventional real estate loans including purchase money first, Buyer, seller, and the loan is inter linked and the seller directly issues the loan to the buyer.
What is the best loan to purchase land?
Some of the best loans to purchase land options are as:
- seller financing
- local lenders or
- a home equity loan.
Do you need a loan estimate purchase money mortgage?
Yes, you can use a loan estimate purchase money mortgage in order to understand details about a mortgage loan and to access the rate of interest, amount you have, and other related things.
Purchase Money Loan is used strictly for?
Purchase Money Loan is used strictly for sponsoring the purchase of an actual property.
Purchase Money Loan mortgages are a type of loan that is specifically issued to the buyer of a house or home by the seller himself. It is also known by the names of seller financing or owner financing. Thus, in case you wish to buy your own house and are short of funds, you do have an option of Purchase Money Loan.