Purchase Money Mortgages?

Question

Are purchase money mortgages a form of seller financing?

How are purchase money mortgage transactions handled?

Is it a standard document used in real estate transactions?

Should a real estate agent that works with owner occupied buyers/sellers be familiar with the process?

Is this something that they seller will need to work with their lender to secure?

Rich Hupper · Answer

@Jay Hinrichs

Hi Jay, I am studying from a book called "mastering real estate principles by gerald cortesi"

They give an example in the book for purchase money mortgages. Tell me what you think: " Sharon wants to sell her house to brad for $200,000. Brad can get a $160,000 mortgage but only has $30,000 in cash for a down payment. Sharon does not want to lower the selling price by $10,000, so she offers to sell the house for $200,000 and "take back" a loan on the house for $10,000. Brad makes payment to sharon for the loan."

Am I miss interpreting this example?

What confuses me most about these second position mortgages would be who holds legal title if both the security instruments are deeds of trust? I know the trustee for the first position lien would hold legal title but what about sharon's "take back mortgage" in the example above? Does she have no title interest? But rather just a lien?

Douglas Snook · Answer

Rich

You are getting into some details that take the whole semester in law school to review. and that was many years ago. LOL

You are correct that MA is a non judicial foreclosure state (at least for now)

Usually if there is seller financing the seller is going to take a second position to the bank. The seller would not be able to do that unless they have some equity in the property.  For example, seller sells for $300,000. They owe Bank of America $100,000 so they have $200,000 equity. Buyer gets a loan for $250,000 and seller takes back a loan for $50,000. Buyer buys with no money down.

Rich Hupper · Answer

@Douglas Snook Hi Douglas in my research I have found massachusetts is a non judicial foreclosure state which would suggest that loans issued here for real estate purchases would use the deed of trust security instrument rather than the mortgage security instrument. This would also suggest that massachusetts is a title theory state because legal title is held by a trustee not the "owner" aka person in possession of the property. The owner merely has equitable title until a future date when the debt is paid.

If all that is true I am confused how a seller can issue any financing to help a buyer with a purchase because he does not have any title to convey other than equitable title.

Matt Powell · Answer

Directly from my RECampus real estate salesperson course:

Wayne Brooks · Answer

While it's not a commonly used term, a "purchase money mortgage" is ANY mortgage where you go out and borrow the money to finance the purchase.  The distinction is a mortgage/loan used to Buy (purchase) a house, verses one used to Refinance a previously owned house.

Douglas Snook · Answer

I think some of the confusion is coming from the term being used or having different meaning in different states. I have not heard the term "purchase money Mortgage" used in Massachusetts.

Also it differs if you are in a title state or not. In your second example Rich (in MA), legal title is held by the owner on the deed. Then there would be the first mortgage and then the seller's would have a second. Both are liens. Some state consider the granting of a mortgage to be an actual transfer of title to the mortgage company. Like in MA when you finance a car but you don;t get the title until you pay off the loan.

IN MA the bank can go after you for the deficiency after a foreclosure but may not.

A lot of these terms are state dependent.

Rich Hupper · Answer

@Jay Hinrichs

Thanks for the clarification. Your point about the non recourse loan is definitely a great thing to point out with the purchase money mortgage in certain states. I would be interested to see if Massachusetts is one of those states.

I can see the difference now between a take back mortgage where the seller is exchanging equity for a note, and a purchase money mortgage where a 3rd party is lending money.

I know with dodd frank a seller can only seller finance so many deals per year. Do you know if this applies to sellers who finance only portions of a buyer's down payment to assist with a purchase such as with the take back mortgage? Or does it only apply to sellers who enter into installment sales with buyers?

Jay Hinrichs · Answer

@Rich Hupper  I am describing what is common vernacular in the industry... if the seller is financing the purchase they are "taking back " financing in other words exchanging equity for a note and deed of trust or mortgage.

Purchase money is when an unrelated 3rd party ( IE typically a bank) puts up money in the form of a loan secured by deed of trust or mortgage and this loan is used to buy owner occ principal resi..

it can also be purchase money loan for any other scenario when its third party funds.  the cool part in the 12 states for home owners is that there is no Deficiancy judgement allowed on a purchase money loan form a third party.. the sole remedy of the lender is the property.  other states ( the majority can get judgements against a homeowner NOT super common but its available to a lender.

I believe in what your describing the 2nd lien has title rights like the first its just subordinate ot the first is all. they have the right to foreclose just like the first. does.

Jay Hinrichs · Answer

@Benjamin Cowles @Rich Hupper   Rich this Is not correct.

Purchase money mortgage relates to a first position mortgage or Deed of trust that is used to buy a primary residence.. and the salient fact is there is NO DEFICIANCY judgment available to the lender in this case. now this is true in about 12 states.. in the other states a deficancy is allowed in purchase money.. what Rich is describing is a seller carry back..

Purchase money is a third party lender providing he financing or debt for the sale.

Rich Hupper · Answer

Purchase Money Mortgage: A deferred purchase money mortgage is taken back by the seller to defer the payment of part of the purchase price. It may be a first or second mortgage. They are also called take back mortgages. They are usually short term and have a balloon payment. They are a form of seller financing that gives title to the buyer ( unlike a land contract where title stays with the seller ).  The use of this would be to help a buyer with continue with a purchase if he did not have enough of a down payment to meet the senior lien holders requirements for funding.

If the buyer's first position mortgagee requires an LTV of 75% but the buyer only has 10% for a down payment, the buyer asks the seller for a purchase money mortgage of 15% to make up the difference.

Purchase Money Mortgages?

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