The Real Estate Encyclopedia
How Does A Purchase-money Mortgage (or Take-back Mortgage) Work?
Category - Mortgage Questions - Mortgage Loans FAQ's

The Purchase-Money mortgage (PMM) is a creative financing approach, which was born when interest rates were high.  Usually the seller agrees to finance a portion or the entire purchase price, as opposed to the land contract, where the amount financed is always the entire amount, less the buyer’s down payment.  A PMM is also known as a take-back mortgage.

 

If, for example, a buyer has only 10% to put down but wants to avoid incurring PMI (Private Mortgage Insurance) payment and the buyer has excellent credit, job stability and savings, the seller may agree to loan the borrower another 10% of the sales price.  The 20% down payment would not require PMI.   

 

At the closing, the seller pays off the existing mortgage and “takes back” a mortgage on the property just sold. The seller establishes a junior lien on the property and receives payments from the buyer until the loan is paid in full.  This would occur with the approval of the lender negotiating the 80 percent loan. 

 

Sellers considering this type of loan must consult a financial expert and understand the consequences of holding a second mortgage on a home, should the buyer foreclose on the property.   

 
Category(s)
Mortgage Questions - Mortgage Loans FAQ's
Home Buying Questions - General Home Buying FAQ's
Home Selling Questions - General Home Selling FAQ's
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