What Is a Purchase Loan?

If potential homebuyers can't qualify for a traditional mortgage loan from a bank, they can investigate a loan provided by the home's seller. This is called a purchase money loan. Purchase money loans are often used by buyers who have trouble qualifying for a traditional mortgage due to poor credit, or by those who do not have enough cash available for the down payment they need. If you are offered seller financing, you should still have an independent appraisal done to ensure that you are not overpaying or taking out a larger loan than the property is worth. The term "purchase money loan" is sometimes used for any mortgage used to buy a home or property. This is to distinguish loans used for purchasing a property from home equity loans or refinanced mortgages. It is seller financing, seller's loan, owner financing, owner's loan, purchase-money mortgage, purchase-money loan

How does Purchase Loan Works?

Purchase money loans usually take one of three forms:

• If the seller does not have a mortgage, the buyer pays a down payment and the remaining cost of the home is financed by a purchase money loan from the seller. The seller establishes the monthly payment and interest rate.
• If the seller still has a mortgage on the home, the buyer assumes responsibility for the seller's mortgage payments. The difference between the down payment and the remaining mortgage amount is the purchase money loan financed by the seller. The buyer pays the loan in installments equal to the monthly cost of the mortgage until they own the property.
• The buyer purchases the home using a down payment and a traditional bank loan but does not qualify for a large enough loan to cover the price of the house. The portion of the purchase price not covered by the down payment or the bank loan is the purchase money loan financed by the seller.