Purchase-Money Mortgage

Purchase-Money Mortgage: Definition and Overview

A purchase-money mortgage (also called seller financing or owner financing) is a loan the seller provides to the buyer as part of a property sale. Instead of the buyer obtaining a loan from a bank, the buyer pays a down payment to the seller and issues a financing instrument (mortgage, deed of trust, or promissory note) for the balance. Terms such as interest rate, payment schedule, and loan length are negotiated between buyer and seller.

This arrangement can also occur when a buyer assumes the seller’s existing mortgage and the seller finances the difference between the mortgage balance and the sales price.

Key takeaways
* Seller provides financing when traditional mortgage approval is unavailable or undesirable.
* Terms are negotiated and generally more flexible than conventional lenders’ requirements.
* Security is typically recorded in public records to protect both parties.
* Can speed up closing and reduce lender fees, but carries risks for both buyer and seller.

How It Works (Basics)

• The buyer pays a down payment and executes a financing instrument that the seller holds.
• The security instrument (mortgage, deed of trust, or contract) is usually recorded so the buyer obtains equitable or legal protection.
• If the property has an existing mortgage, an alienation (due-on-sale) clause may allow the lender to accelerate the loan when the property is sold—this is an important risk to check before proceeding.
• Payments from the buyer go to the seller according to the agreed schedule until the loan is paid off or refinanced.

Common Types

• Land contract (contract for deed): Legal title remains with the seller until the buyer completes payments; the buyer typically has equitable title and receives the deed after final payment or refinance.
• Lease-purchase agreement: The buyer leases the property with an agreement that rental payments (or a portion) will apply toward purchase; title transfers after the buyer fulfills the agreement or obtains financing.

Benefits for Buyers

• More flexible qualification criteria compared with institutional lenders.
• Negotiable down payment and payment terms—options may include interest-only, fixed amortization, graduated payments, or balloon payments.
• Lower closing costs (no lender origination, discount points, or many administrative fees).
• Faster closings in many cases, since buyer and seller control financing directly.

Benefits for Sellers

• Potential to receive full list price or a premium by offering financing.
• Payments can create regular cash flow and may earn a higher interest rate than low-risk investments.
• Potential tax advantages when structured as an installment sale (consult a tax professional).

Risks and Considerations

• Sellers take on credit risk if the buyer defaults and may need to foreclose to recover the property.
• Buyers may face title or acceleration risk if an existing mortgage contains a due-on-sale clause.
• Fewer consumer protections than traditional mortgage transactions—both parties should document terms clearly, record security instruments, and obtain independent legal advice.
• An appraisal and title search are strongly recommended to verify value and ensure clear title.

Frequently Asked Questions

Do purchase-money mortgages have to be recorded?
Yes. The financing instrument should be dated and recorded with the deed (or otherwise properly documented) to protect both parties and establish priority in public records.

Is an appraisal required?
Not by default—because no institutional lender may be involved, buyer and seller can decide. However, obtaining an appraisal is strongly recommended to confirm the property’s value.

Does the seller keep title?
It depends on the arrangement. In a land contract, the seller retains legal title until the contract is satisfied. In a conventional seller-held mortgage or deed of trust, legal title usually transfers to the buyer while the seller retains a security interest.

Bottom Line

A purchase-money mortgage can be a practical alternative when traditional financing is unavailable or when both parties prefer a negotiated, flexible sale structure. It offers benefits such as flexible qualification, lower closing costs, and faster closings, but also involves risks—especially credit and title risks. Both buyers and sellers should obtain an appraisal, perform a title search, and consult appropriate legal and financial advisors before completing the transaction.

Sources

• Rocket Mortgage — “Land Contracts: What They Are and How They Work”
• Rocket Mortgage — “Lease Purchase Agreement: What You Should Know”
• Internal Revenue Service — Topic No. 705: Installment Sales